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2 No-Brainer Artificial Intelligence (AI) Stocks to Buy Now That Could Soar Like Nvidia

Motley Fool - Mon Nov 6, 2023

Analysts at Bloomberg expect generative artificial intelligence (AI) to become a $1.3 trillion industry as companies develop complex AI-based applications and the training infrastructure to support them.

Advanced Micro Devices(NASDAQ: AMD) and Super Micro Computer(NASDAQ: SMCI) focus on the latter side of the market and could enjoy impressive growth as the opportunity expands. Let's discuss why they could make good alternatives to the current market leader, Nvidia.

Advanced Micro Devices

With shares up by a whopping 68% year to date, AMD stock has risen substantially in anticipation of an AI-driven boost in its revenue and earnings potential. While the company seems to have a slower product launch cycle than its biggest rival Nvidia, new AI chips could become an increasingly important part of its operations.

So far, Nvidia has been the biggest beneficiary of the generative AI trend, with sales of data center chips like the A100 and H100 already boosting revenue. AMD has been much later to the party. In the fiscal third quarter, its data center revenue was flat at $1.6 billion despite launching its new MI300A and MI300X graphics processing units (GPUs) designed to serve AI and cloud computing workloads. That said, AMD's management is hugely optimistic about the potential of this new hardware.

According to CEO Lisa Su, "multiple, large hyperscale customers" have committed to buying M1300 chips. And AMD expects the products to add a whopping $2 billion to its top line in 2024. Over the long term, investors can also expect a recovery in AMD's other businesses, like gaming hardware, when challenges like high interest rates (which hurt consumer purchasing power) ease -- although it is unclear when that will happen.

For investors, AMD's forward price-to-earnings (P/E) multiple of 26 looks quite reasonable, considering its exposure to a fast-growing and potentially high-impact industry like generative AI. For context, the S&P 500 has an average P/E of 24.

Super Micro Computer

With its share price rocketing by 192% year to date, Super Micro Computer's 2023 performance has somewhat mirrored Nvidia's, which is up by a slightly higher 204% in the same period. Supermicro's bull run can continue because of its deep industry partnerships and relatively low stock valuation compared to other AI-related alternatives.

A person looking at stock charts on a computer.

Image source: Getty Images.

Unlike AMD or Nvidia, which tackle the AI opportunity by providing specialized GPUs, Supermicro sells pre-built servers designed to facilitate the use of these chips for AI and other data center workloads. While it plays in a competitive industry, it stands out because of its partnership with Nvidia (it builds its servers based on Nvidia hardware) and its focus on energy-efficient designs, which are important for training demanding AI platforms in a cost-efficient manner.

Supermicro's management expects sales of $10 billion to $11 billion in fiscal 2024, which is a 47% jump from the $7.12 billion generated in the prior-year period. And with a price-to-sales (P/S) multiple of 1.98 compared to the S&P 500 average of 2.37, the stock is a relatively cheap way to bet on the AI opportunity.

Focus on fundamentals, not hype

As with previous technology bombshells like the internet in the early 2000s, artificial intelligence has generated a lot of hype that might not always translate into sustainable shareholder value. That said, infrastructure-focused companies are generally a safer bet because they have a "picks-and-shovels" approach, which leads to stronger moats and less competition than consumer-focused alternatives.

AMD and Supermicro could make excellent alternatives to Nvidia because of their reasonable valuations and compelling long-term growth drivers.

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Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices. The Motley Fool recommends Super Micro Computer. The Motley Fool has a disclosure policy.

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