The artificial intelligence (AI) narrative is in full swing. While mega-cap technology companies have helped fuel the AI revolution, investors have identified several other businesses that are playing an important role.
Super Micro Computing (NASDAQ: SMCI ) is an IT architecture company specializing in server rack design and storage clusters. Works closely with the company. Nvidiathe current poster child for all things AI.
With the high demand for Super Micro’s services, investors are buying the stock in large numbers. Despite his meteoric rise and recent inclusion S&P 500I see better opportunities out there.
Let’s dig into Super Micro’s investment prospects relative to its peers and assess what other options investors have.
Supermicro is on a roll, but…
Growing demand for Nvidia’s graphics processing units (GPUs) and data center services has been a bellwether for Supermicro, which has seen revenue grow by more than 100% annually. And the pace doesn’t seem to be slowing down.
But one thing that stands out to me about Super Micro’s price action is that the stock trades wildly in tandem with Nvidia. Although Supermicro and Nvidia have a significant relationship with each other, the two businesses are quite different.
Additionally, given that Super Micro’s profit margins have actually been shrinking during such strong periods of revenue growth, I’ve found myself scratching my head as to why the stock continues to rise more and more.
This second AI stock could be a hidden gem, and…
Super Micro competes with other IT architecture designers including IBM, Hewlett Packard Enterprise, Lenovo GroupAnd Dell Technologies (NYSE: DELL). The common thread that connects all these competitors is that they are all diversified businesses and have much more to offer than Super Micro.
Dell recently reported earnings for the full fiscal year 2024, ending February 2. Overall revenue fell 14% year over year to $88 billion. Sales in its infrastructure solutions group (which includes storage, servers and networking) fell 12 percent year over year to $33.9 billion.
Given that Dell’s IT architecture business is in decline, and Super Micro is growing like a weed, why do I see Dell as a better investment option?
… The disparity of assessment is clear.
The chart below illustrates the Price-to-Sales (P/S) multiples of various companies competing in IT networking solutions.
At a P/S of 5.5, Supermicro is the most expensive stock in this peer group based on this metric. The next closest is IBM, which is trading at a P/S of about half that of Supermicro.
The disparity in valuation multiples between Super Micro and its peers is hard to ignore. But even with a P/S of 0.9, investors should realize that this is well above Dell’s five-year average.
Like many companies even related to AI, Dell shares are clearly seeing some momentum. While I don’t see the stock as cheap, I’m more optimistic about its long-term prospects than Super Micro.
What worries me most about Super Micro is its heavy reliance on Nvidia. While the chipmaker has a strong pulse on high-speed computing, I suspect the competition will increase over the next few years.
As such, I think it’s reasonable that businesses will outsource their data center and need more than one chip provider. This could slow Nvidia’s growth, and in turn affect Supermicro.
So while I don’t necessarily see rapid growth for Dell in the near term, I think the company’s role in integrated IT services will begin to grow. As such, Dell could experience a positive leap and return to more respectable levels of sustainable growth in the long run.
Given the discount Dell stock trades compared to Super Micro, I’d at least consider buying the former. A wiser strategy might be to monitor Dell’s performance over the next couple of quarters — keeping in mind that AI is going to be a long-term game.
If Dell appears to be taking a step against the competition, using dollar cost averaging can be a good way to gain exposure to this unique pocket of the AI realm.
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Adam Spotako has positions in Nvidia. The Motley Fool has positions and recommends Nvidia. Motley Fool International recommends Business Machines. The Motley Fool has a Disclosure Policy.
Forget super-microcomputing. Here are 1 artificial intelligence (AI) stocks to buy instead. Originally published by The Motley Fool.