AMD (Advanced Micro Devices):
AMD manufactures CPUs (central processing units) and GPUs (graphics processing units) used in various applications, including AI and machine learning. AMD’s GPUs are particularly important for AI tasks because they can process large volumes of data in parallel. In the last twelve months alone, AMD’s shares have jumped 48%, with a diluted EPS growth of around 190%.
The company has invested in improving its GPUs for AI applications and has collaborated with other companies and organizations to develop AI solutions. AMD’s acquisition of Xilinx has also expanded its presence in the AI market, especially with FPGAs (Field-Programmable Gate Arrays) used in AI inference.
In light of these developments, Wall Street is forecasting revenue growth of 11% for the next fiscal year, almost double the average for the microprocessor industry. Such projections have led the company to trade at a valuation seen as stretched by many, with the market calculating a forward P/E ratio of 45x for AMD stock and a PEG ratio of 1.08x for the next five years.
However, such a valuation is not seen as a problem from the experts’ point of view. The consensus among analysts is a “Strong Buy” rating for AMD, with an average price target of $192.56 for the next twelve months from 35 Wall Street analysts. Based on the company’s share price of $160.43 as of the trading session on May 23rd, AMD shares still have a potential upside of 20%.
NVIDIA:
Number one AI darling NVIDIA is widely recognized as a leading provider of GPUs for AI and deep learning. NVIDIA GPUs are used in data centers, supercomputers, and edge devices to train and infer AI models. Over the last twelve months, NVDA shares have jumped more than 240%, with revenue growth of 208% and diluted EPS growth of 791% year-over-year.
NVIDIA has developed the CUDA platform, which allows developers to use GPUs for general-purpose computing. The company also offers AI libraries and frameworks, such as TensorRT and cuDNN, which facilitate the development and optimization of AI models.
In addition to GPUs, NVIDIA has launched specialized hardware for AI, such as the NVIDIA DGX product line and the NVIDIA Clara AI platform for healthcare.
As NVIDIA’s AI initiatives have yet to peak, Wall Street predicts that the company could still grow its revenues by 78% this year and its bottom line by around 118%. In light of this, the company, which recently surpassed the $1,000 per share level, trades at a forward P/E ratio of 38.4x and a PEG ratio of 1.02x for the next five years, which is lower than AMD’s.
While Wall Street analysts are mostly bullish on the company, with 37 out of 40 suggesting a “Strong Buy” rating, the average price target of $1,181.29 indicates an upside of 13%, considering the share price of $1,046.98 as of the trading session on May 23rd. This potential upside is lower than that of AMD.
Super Micro Computer:
Without the same hype as Nvidia and AMD and with a market value that seems minuscule compared to the big tech giants, Super Micro Computer has skyrocketed more than 400% in the last twelve months. It is also one of the leading AI stocks at the moment.
Super Micro is known for its high-performance servers, which are essential to supporting AI applications’ processing demands in data centers and cloud computing environments.
The company offers AI-optimized solutions, including servers with high-performance GPUs from NVIDIA and powerful processors from AMD. Super Micro also works closely with AI software vendors to provide integrated, AI-ready systems.
Despite shares appreciating almost twice as much as NVIDIA in the last twelve months, Super Micro has grown its revenues by 79% and its diluted EPS by 69%. For this year, analysts expect the company to increase revenues by 65% and diluted EPS by 81%.
The great thing about Super Micro compared to other AI giants is that its valuation multiples are less stretched. The company trades at a forward P/E ratio of 35x and a PEG ratio for the next five years 0.76x, well below Nvidia and AMD.
Although the analyst consensus on Super Micro is only a “Moderate Buy,” six out of ten analysts recommend buying SMCI stock, the average price target is $1,097.78. Considering the share price of the trading session on May 23rd, this suggests an upside potential of around 30% for the next twelve months.
The Verdict
Despite not enjoying the same bullish consensus on Wall Street compared to AI giants such as AMD and NVIDIA, experts see Super Micro stock as having a greater upside potential. This is mainly due to valuation issues, where paying 35 times earnings today could be justified by the expected growth in earnings over the coming years. If this growth materializes as projected, it could result in a good return on investment in the long term.
However, if growth expectations fail to materialize, paying such a high multiple could become a trap for Super Micro, AMD, and Nvidia if they encounter obstacles. This is especially concerning considering that their margins of safety are relatively low.
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content)
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