The Rise of Nvidia and the AI Boom

Nvidia has been a standout performer in the S&P 500 this year, with its stock surging 136% since January, driven by the frenetic interest in artificial intelligence (AI). Wall Street analysts forecast a median upside of 30% from Nvidia's current share price of $115.

• AI is expected to add more than $15 trillion to the global economy by 2030, according to consultancy PwC.
• Numerous companies beyond Nvidia are poised to benefit as AI technology diffuses through different industries.

Introducing Super Micro Computer: A Key AI Server Supplier

Instead of solely focusing on Nvidia, investors should consider Super Micro Computer, a leading server maker that is well-positioned to capitalize on the AI boom. Super Micro is scheduled for a 10-for-1 stock split in late September, and two analysts value the company at $1,300 per share, implying 195% upside from its current split-adjusted price of $440.

Super Micro's Competitive Advantages in AI Servers

Super Micro develops accelerated computing platforms, including storage systems and servers, for enterprise and cloud data centers. The company stands out with its internal manufacturing capabilities and modular approach to product development.

• Super Micro uses electronic "building blocks" that can quickly be assembled into a broad range of servers.
• The company handles most assembly and testing internally, enabling rapid prototyping and product releases, often 2-6 months ahead of competitors.
• This time-to-market advantage has helped Super Micro secure a leadership position in the AI server market, which is expected to grow at 30% annually through 2033.

Recent Challenges and the Hindenburg Research Allegations

Super Micro reported mixed financial results in Q4 2024, with revenue growth of 144% but contracting gross margins due to costs associated with direct liquid cooling (DLC) components. The company expects margins to normalize between 14-17% by the end of fiscal 2025 as DLC solutions ship in higher volume.

Additionally, short-seller Hindenburg Research targeted Super Micro with allegations of accounting irregularities, related party transactions, and customer issues. The company has dismissed the allegations and does not anticipate material changes to its Q4 or fiscal 2024 financial results.

Valuation and Growth Prospects

Analysts expect Super Micro's adjusted earnings to grow at 41% annually through fiscal 2026, making the current valuation of 20 times earnings appear cheap. The stock also trades at a discount to rival server maker Dell Technologies.

• Super Micro's PEG ratio of 0.5 is a material discount to its three-year average of 0.9.
• Dell Technologies has a higher PEG ratio of 1.7.

Should You Invest in Super Micro Computer?

For risk-tolerant investors, a small position in Super Micro Computer could be considered. The stock could rebound significantly if the short report allegations prove insignificant and the company's gross margin expands in the coming quarters.

However, shares could also decline further if the allegations lead to material consequences or if margins fail to improve as expected.

Motley Fool's Recommendations

The Motley Fool Stock Advisor team has identified what they believe are the 10 best stocks for investors to buy now, and Super Micro Computer is not among them. The recommended stocks could potentially produce monster returns in the coming years, similar to Nvidia's performance when it was recommended on April 15, 2005 (a $1,000 investment would now be worth $708,348).