Forget Super Micro Computing. Here's 1 Artificial Intelligence (AI) Stock to Buy Instead.

Forget Super Micro Computing. Here's 1 Artificial Intelligence (AI) Stock to Buy Instead.

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The artificial intelligence (AI) narrative is in full swing. While megacap technology companies have helped ignite the AI revolution, investors have identified several other businesses playing a leading role.

Super Micro Computing (NASDAQ: SMCI) is an IT architecture company specializing in server rack design and storage clusters. The company works closely with Nvidia, the current poster child for all things AI.

With Supermicro’s services in high demand, investors have been buying the stock in droves. Despite its meteoric ascent and recent inclusion in the S&P 500, I see better opportunities out there.

Let’s dig into Supermicro’s investment prospects relative to its peers and assess what other options investors have.

Supermicro is on a roll, but…

Surging demand for Nvidia’s graphics processing units (GPUs) and data center services has served as a bellwether for Supermicro, whose revenue is growing over 100% annually. And the momentum doesn’t appear to be slowing down.

But one thing that I find peculiar about Supermicro’s price action is that the stock trades eerily in tandem with Nvidia. While Supermicro and Nvidia have an important relationship with each other, the two businesses are quite different.

Moreover, given that Supermicro’s profit margins are actually declining during such robust periods of revenue growth, I’ve found myself scratching my head as to why the stock is moving higher and higher.

A person working in a data center

Image source: Getty Images.

…this other AI stock could be a hidden gem, and…

Supermicro competes with other IT architecture designers including IBM, Hewlett Packard Enterprise, Lenovo Group, and Dell Technologies (NYSE: DELL). The common thread that ties all of these competitors together is that they are all diversified businesses and arguably have more to offer than Supermicro.

Dell recently reported earnings for the full fiscal 2024, ended Feb. 2. Overall revenue declined 14% year over year to $88 billion. Sales in its infrastructure solutions group (which includes storage, servers, and networking) dropped 12% year over year to $33.9 billion.

Given that Dell’s IT architecture business is on the decline, and Supermicro is growing like a weed, why do I see Dell as a better investment option?

…the valuation disparity is clear

The chart below illustrates the price-to-sales (P/S) multiple of a number of companies competing in IT networking solutions.

SMCI PS Ratio Chart

SMCI PS Ratio Chart

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 nearly half that of Supermicro.

The disparity in valuation multiples among Supermicro and its cohorts is tough to ignore. But even with a P/S of 0.9, investors should realize this is much higher than Dell’s five-year average.

Like many companies even tangentially related to AI, shares of Dell are clearly witnessing some momentum. While I don’t see the stock as cheap per se, I am more optimistic about its long-run prospects compared to Supermicro.

What concerns me about Supermicro the most is its heavy reliance on Nvidia. While the chipmaker has a strong pulse on accelerated computing, I suspect competition will be on the rise over the next few years.

As such, I think it’s reasonable that businesses will be outsourcing their data center and chip needs to more than one provider. This could spell decelerating growth for Nvidia, and Supermicro could be affected as a consequence.

So while I do not necessarily see exponential growth for Dell in the near term, I think the company’s role in integrated IT services will begin to rise. As such, Dell could experience a positive jump and return to more respectable levels of sustained growth in the long term.

Given the discount Dell stock trades at compared to Supermicro, I would at least consider buying the former. A prudent strategy could 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 looks to be making inroads against the competition, employing dollar-cost averaging could be a good way to gain exposure to this unique pocket of the AI realm.

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Adam Spatacco has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends International Business Machines. The Motley Fool has a disclosure policy.

Forget Super Micro Computing. Here’s 1 Artificial Intelligence (AI) Stock to Buy Instead. was originally published by The Motley Fool

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