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2 AI Growth Stocks That Could Go Parabolic

Motley Fool - Fri Nov 10, 2023

Artificial intelligence (AI) has become the talk of the town in 2023. This is unsurprising, considering that, according to research firm McKinsey & Company, AI could contribute a whopping $13 trillion to global economic activity by 2030.

With AI technologies becoming increasingly embedded in our daily lives, the stock market has also recognized the investment potential of this secular trend. In this context, astute investors stand to benefit immensely by adding rapidly growing AI stocks, such as Super Micro Computer (NASDAQ: SMCI) and Amazon (NASDAQ: AMZN), to their portfolios.

Let's delve deeper into these AI stocks that have the potential to grow dramatically in the coming months.

Super Micro Computer

Once considered just a commodity server provider, Super Micro Computer emerged as a force to reckon with in the world of AI hardware. The company specializes in designing high-end servers and storage solutions to power diverse applications in areas such as cloud computing, the Internet of Things, 5G mobile networks, autonomous driving, edge computing, and AI servers for over 1,000 clients across 100 countries.

SuperMicro's "building block" (modular and open-architecture) approach to designing highly customizable high-performance server and storage solutions has helped it differentiate itself in a market full of generic server providers. Since the company's server solutions are highly scalable and adaptable, customers can reduce the cost of upgrades by replacing only the required components.

Furthermore, since AI applications are power-intensive, its data center clients increasingly prefer the company's energy-efficient solutions and cooling technologies. All this implies that the company can rapidly capture share in the booming AI server market expected to grow annually at a compounded average growth rate (CAGR) of 50% from $30 billion in 2023 to $150 billion in 2027.

SuperMicro posted impressive numbers in the recent quarter (first quarter of fiscal 2024 ended September 30, 2023), with revenues of $2.1 billion surpassing the consensus estimate by $57 million and adjusted earnings per share (EPS) of $3.43 ahead of the consensus estimate by $0.18. However, the stock has not seen significant appreciation, as investors seem worried about the slight compression in the company's gross margins and operating margins.

With the supply of graphics processing units (GPUs) and key components constrained, SuperMicro's utilization at the U.S. and Taiwan manufacturing capacity has been only 60% in the first quarter. As supply constraints get resolved, the company expects to increase its capacity utilization, thereby reducing costs. It is also building a new low-cost manufacturing plant in Malaysia and plans to transition more manufacturing to the lower-cost Taiwan and Malaysia plants, further reducing expenses.

SuperMicro is currently trading at a price-to-sales ratio of 1.9x and a price-to-earnings ratio of 23.6x -- quite reasonable, considering the company guided for year-over-year net sales growth of 40.4% to 54.5% ($10 billion to $11 billion) for fiscal 2024.

In the context of the huge untapped AI server opportunity, a well-established technological advantage, and improving financials, SuperMicro's share price can grow rapidly in the coming years.

Amazon

Shares of e-commerce and cloud computing giant Amazon gained nearly 70% so far in 2023 -- a commendable feat, especially after the stock lost almost half its value in 2022. However, the stock's growth may be far from over, considering AI is deeply embedded in all the company's business lines.

Amazon posted impressive numbers in the third quarter (ended September 30, 2023), with revenues growing 13% year over year to $143 billion and operating profit surging by a dramatic 348% year over year to $11.2 billion.

Undoubtedly, the company's e-commerce business is showing signs of improvement due to the success of the regionalization strategy, which includes several activities, such as connecting fulfillment centers directly to delivery stations, increasing local stock levels to reduce transportation distances, and expanding the number of fulfillment centers. The company has also been leveraging AI in areas such as product discovery, inventory forecasting, and transportation logistics. All these initiatives have translated into improvements in operational efficiency (lower costs and reduced delivery times) for the e-commerce business.

Additionally, the company recently launched the "Supply Chain by Amazon" initiative -- an end-to-end supply chain program allowing third-party sellers to handle logistics easily.

This solution is expected to reduce costs and improve delivery times for third-party sellers (a high-margin business) -- benefits that can be passed on to customers -- resulting in even more sales and profits for Amazon. Since Amazon already has a broad, robust logistics network for sourcing and shipping products, this service adds a new revenue stream at low incremental costs for the company.

Amazon's cloud computing business, Amazon Web Services (AWS), also shows signs of stabilization after grappling with a slowdown associated with customers optimizing cloud spending. AWS continues to dominate the global cloud infrastructure market with a 32% share.

Amazon is also seeing solid demand for its Bedrock service, which enables AWS customers to build generative AI applications. Additionally, Amazon plans to invest $4 billion in AI company Anthropic to further enhance AWS's large language model AI capabilities.

Amazon is currently trading at a price-to-sales (PS) ratio of 2.6x, even lower than its 10-year average P/S ratio of 3x.

Considering the operational improvements in the e-commerce business, stabilization of the cloud computing business, superior AI capabilities, and a reasonable valuation, Amazon presents a favorable entry point for retail investors.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Manali Bhade has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool recommends Super Micro Computer. The Motley Fool has a disclosure policy.

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