The stock market has risen impressively so far in 2023, thanks to multiple reasons, such as a resilient U.S. economy and slowing inflation, which could keep the Federal Reserve from raising interest rates further. Some analysts are predicting the market will make further gains in 2024.
The S&P 500 index has gained 18% so far this year. Technology stocks, meanwhile, have delivered stronger gains, with the Nasdaq Composite index rising 36% so far in 2023. The solid surge in tech stocks can be attributed to a major catalyst in the form of artificial intelligence (AI), as the adoption of this technology is helping multiple companies unlock new growth opportunities.
Advanced Micro Devices(NASDAQ: AMD) and Super Micro Computer(NASDAQ: SMCI) are two tech stocks that are capitalizing on AI growth. Both companies have delivered solid returns so far this year, yet they are trading at relatively attractive valuations. So if you have $1,000 in investable cash right now -- which means that your bills are paid, you've paid off any high-interest loans, you have enough saved for a rainy day, and you won't need the money in the near term -- it could be a good idea to put that money into these stocks.
1. Advanced Micro Devices
A $1,000 investment in AMD stock at the end of 2022 is now worth more than $1,800.
This impressive jump in AMD stock this year means it's trading at a relatively expensive 9 times sales right now, compared with its price-to-sales ratio of 4 at the end of 2022. However, a look at the bigger picture indicates that even though AMD stock has become more expensive, it could still be a bargain in the long run on account of the massive addressable opportunity it's sitting on.
AMD has been a late mover in the AI chip market, where rival Nvidia has built a solid position for itself with a robust market share. However, AMD has started gaining some traction here and expects solid growth in AI chip revenue in 2024.
AMD recently announced that Microsoft has selected its MI300X AI chip for deployment in the Azure cloud. That makes Microsoft the first cloud services provider to use the new chip, however it may not be the only customer that has turned to AMD to supercharge its AI ambitions.
CEO Lisa Su said in comments on the October earnings conference call with analysts that she expects AI chip sales of more than $2 billion in 2024. Given that the company expects sales of its data center graphics cards to land at $400 million in the current quarter, its 2024 forecast points toward an acceleration in growth, with a quarterly revenue run rate of $500 million. And there's a good chance that AMD could generate much higher revenue from the AI chip market next year by procuring a greater supply of chips from its foundry partner.
Analysts are anticipating AMD to deliver $26 billion in revenue in 2024, which would be a 17% jump from this year's expected level. In 2025, AMD is expected to deliver another year of robust double-digit growth with its revenue estimated to hit $30.7 billion.
Check out estimates in the chart below:
I wouldn't be surprised to see AMD clocking faster growth than what analysts are anticipating and the market could reward AMD with a higher sales multiple, considering that rival Nvidia is trading at 37 times sales thanks to the red-hot growth the company has been delivering.
Assuming AMD maintains its current price-to-sales ratio of 9 in 2025 and hits Wall Street's revenue target of $30.9 billion, its market cap would increase 45% from current levels. If that turns out to be the case, AMD could turn a $1,000 investment into more than $1,400 in the next couple of years.
2. Super Micro Computer
Shares of Super Micro Computer have erupted big time in 2024, turning a $1,000 investment at the end of 2022 into more than $3,500 as of this writing.
But the stock is trading at just 2.2 times sales despite this tremendous jump. Buying Super Micro stock at this valuation looks like a no-brainer, since the stock seems built for more upside considering how fast it's growing. The company's revenue in the first quarter of fiscal 2024 (which ended on Sept. 30) was up 14% year over year to $2.1 billion. And the company is anticipating faster year-over-year growth of 55% in the current quarter.
Super Micro sees its full-year revenue landing between $10 billion and $11 billion, which would be a 47% increase over last year. The reason the company is growing so rapidly now is that the demand for its modular server solutions has increased because of AI. Super Micro sells complete server systems, including server racks, on which IT equipment is mounted and organized to ensure security and improve airflow to keep the system cool.
With AI chips being sold for tens of thousands of dollars and consuming systems needing huge amounts of electricity, the need for Super Micro's server equipment should continue to remain strong. Not surprisingly, the company pointed out on its earnings call earlier this month that "next-generation AI and CPU platforms continue to drive strong levels of design wins, orders, and backlog."
Foxconn estimates that sales of AI servers could grow fivefold by 2027, suggesting that Super Micro is sitting on a lucrative secular growth opportunity. All this explains why the company believes it could achieve annual revenue of $20 billion in a couple of years, double its fiscal 2024 estimate.
Assuming it does hit that mark in fiscal 2026 and maintains a sales multiple of 2.2, the company's market cap could jump a whopping 175% from current levels to $44 billion. So a $1,000 investment in this AI stock could be worth a lot more in the future, which is why investors should consider buying it now.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Microsoft, and Nvidia. The Motley Fool recommends Super Micro Computer. The Motley Fool has a disclosure policy.