For investors looking at top artificial intelligence stocks to buy, there are a number of great options out there. Of course, there’s everyone’s favorite Nvidia (NASDAQ: NVDA), which continues to see some of the most impressive capital inflows I’ve seen in a long time.
But there are also other companies that are highly-leveraged to this growth trend that are certainly worth considering. Among the top options in the market right now has to be Super Micro (NASDAQ: SMCI). Let’s dive into a list of reasons why this company should be atop investors’ watch lists right now.
The Artificial Intelligence Surge Is Real
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In order for Super Micro to be a decent investment, investors have to believe that the secular tailwinds supporting the stock’s recent move can continue. And while many investors have certainly been made believers in this recent rally, it’s also true that this sentiment isn’t as widespread as many would think. Indeed, there are some who believe that plenty of future demand has been front-run, and companies like Super Micro could be due for a period of stagnation, when the corporate spending dies down.
That’s possible, but I do think the longer-term growth trends tied to the rise of AI will be around for a decade at least, and most likely much, much longer. So long as Super Micro can maintain its position in its core niche, this is a company with plenty of upside potential at its current valuation (more on that later).
Servers and Storage Are Under-Appreciated
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In order for the AI trend to play out as many think, server demand and demand for storage solutions should shoot through the roof. That’s the central underlying component to the bullish thesis behind SMCI stock.
For those who think this will be the case, investing in the picks and shovels of this AI race makes the most sense. Much like Nvidia and the chip angle, investing in the servers and storage capacity to handle the deluge of data demand forthcoming is a wise move.
The Competitive Landscape Leans Toward Super Micro
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As far as competition in the AI realm is concerned, there is plenty. However, Super Micro remains the leader in its operational segments, and I think this will remain the case for some time.
There’s always the possibility of another company popping up and providing what Super Micro does cheaper and better. But for now, corporations and governments want quality and the sort of assurances Super Micro can provide. In this environment, it’s probably best to stick to the largest players in this space.
Consolidation Is Always Possible
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With more than $2 billion in cash on Super Micro’s balance sheet, I think any investor who rules out future acquisitions is likely misled. This is a company at the pinnacle of its peer group, and is likely to aggressively pursue market share as it ramps up. Of course, organic growth is one thing, and Super Micro has plenty of potential in this regard. However, if the opportunity arises, I think the company’s management team will certainly be aggressive in scooping up its competitors and taking a larger share of the market. If anything, this is a potential catalyst to keep an eye on. And maybe the company will simply reinvest that cash into its core business – either way, investors win.
Valuation Matters, and Super Micro’s Is Fair (If Not Cheap)
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Given Super Micro’s growth potential, investors shouldn’t be surprised to see a rather large price tag associated with this stock. And at 47-times earnings, there are certainly plenty of cheaper options in the market investors can choose from.
However, zooming out and looking at the company’s earnings expectations for next year, we can see this number drop to just 23-times. That’s reasonable, if you ask me. And if the company can exceed earnings expectations moving forward, SMCI stock could prove to be the undervalued growth stock everyone should have bought in 2024.
On a price-sales basis, this stock also looks reasonable (given its 200% year-over-year growth rate) at around 4-times.
Growth Remains Robust
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AI-related tailwinds are certainly the key growth driver investors are watching closely right now. But there’s so much more to the Super Micro story. Companies that require server storage and a mix of hardware and software solutions to run their applications are increasingly choosing the bigger players in this space. And as mentioned, Super Micro is certainly a behemoth in this regard.
I think Super Micro’s status in its niche as a large-cap player is a positive. I think this is a winner-take-most market, meaning Super Micro’s 200% year-over-year growth metric could be sustained for a lot longer than many in the market think.
Margins Should Expand Over Time
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As Super Micro continues to grow, and its clientele move toward software services in addition to their hardware purchases, Super Micro stands to benefit. The company’s business model is diversified, and investors will benefit from expanding margins over time, as software sales take up a larger portion of the company’s overall revenue. This is a relatively easy thesis to buy into, but it’s one investors are already clearly factoring in. With current net margins at 8.9%, I see plenty of upside ahead as the company sees its revenue mix improve.
Institutional Ownership Remains Strong
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It’s one thing for a company to diversify its client base, and venture into new verticals. However, keeping institutional investors on board is a big factor many consider as well. In this regard, Super Micro has done a fantastic job, with an institutional ownership percentage around 60%.
It’s clear big money managers are focusing on the most likely companies to succeed in an AI future, and drive it forward. For now, Super Micro deserves its standing as a top AI-related pick – at least, the big money thinks so.
Valuations Could Still Expand From Here
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As mentioned, I don’t think Super Micro’s valuation is excessive. If anything, I think it’s underpriced, relative to the company’s’ growth potential.
But if we do enter into an era of rate cuts, and growth goes bananas 2021-style, then the company’s multiple could really take off. If that’s the case, and Super Micro is able to benefit from both sky-high growth and multiple expansion, all bets are off as to how high this gem can fly.
Analysts Remain Very Bullish on This Stock
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Analyst ratings can certainly be brushed off, in many cases. However, when most analysts are on one side of the boat, and the consensus price target for a given stock approaches 26% upside, investors should take notice.
Personally, I think the consensus price target of $1,066 on SMCI stock may prove to be light, given how the company has been performing thus far. Of course, there’s risk with upcoming earnings reports, and the company’s management team will need to continue hitting the ball out of the park. But assuming Super Micro is able to do so, this is a stock with big upside. I’d trust the analysts on this one.
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