The rise of Artificial Intelligence over the past year, and the resulting race for AI infrastructure across the world have led to a stunning rally in stocks that were even tangentially related to the mania. The biggest beneficiaries of course were semiconductors giant,Nvidia (NVDA: $902) and server management and storage systems provider Super Micro Computer (SMCI: $783)Â posting rallies of 240% and 250%, respectively in 2023, showing no signs of slowing.
Nvidia is up another 84% so far this year, and Super Micro Computers by an incredible 175% in just 4 1/2 short months. With the former’s valuations at $2.2 trillion, it seems only rational to question the rationale behind this run-up, but this is because most analysts and industry watchers fail to grasp the sheer scale and magnitude of what lies ahead and the role of these two companies in this exploding business.
From tech giants such as Google and Amazon to automotive companies such as Tesla, everyone is going all out to gain the upper hand with AI, and Nvidia’s graphic cards are perfect for parallel processing power that is essential for large language models (LLMs). The company currently has a 90% share in the burgeoning AI chip market, with a robust product roadmap aimed at maintaining this sizable lead.
To put this in perspective, Nvidia’s 2023 data center revenues stood at $48 billion, more than triple that of its prior year, with the potential to multiply by nearly three times more over the coming years. At the same time, its closest competitors in this segment, AMD and Intel have forecasted 2024 revenues from AI graphics cards and accelerators at $4 billion and $500 million, respectively, leaving them eons behind.
Coming to Super Micro Computers, while the company does not make AI chips, it does manufacture crucial server products and components on which the AI infrastructure is built on. It makes the metaphorical shovel that is fueling this AI gold rush. Just like Nvidia, Super Micro’s sales have grown at an unprecedented rate in recent years, 46% in 2022 and 37% in 2023 riding the same tailwinds. The company currently controls half of the $12 billion AI server market, which is expected to hit $50 billion by 2029. Its biggest competitive edge is its deepening partnership with Nvidia, whose products come mounted in Super Micro’s racks. With this, the company is all set to double its revenues in 2024, to $15 billion, making its current valuation of 4 times sales and 22 times earnings compelling.
Prominent analysts from firms such as Goldman Sachs and others have raised their Price Targets for the stock, to the $1,100 range. The same goes for Super Micro, with an average Price Target of $1,130, an upside of 40% from current levels. When dealing with forces set to have a $7 trillion impact, the age-old tried-and-tested rules of value investing no longer apply. We do not believe we are in a bubble, which some on Wall Street are espousing. We believe it is just the beginning of a massive change in computing that is changing the world that we live in, at home, at work, and at play.
Our Target for Nvidia is $900 with a Sell Price of $700. We are hereby raising our Target to $1,200 and leaving the Sell Price at $700, although if the stock drops to that level, we would more than likely be looking to add more at that price. For SMCI, our Target is $1,300 and our Sell Price is also $700. We had set the Target at $1,300 during the months of February and March when it rallied from the $800 level to $1229. We fully expect new highs to be reached in both stocks this year.
Note that Super Micro is still a puppy compared to Nvidia, clocking in at $45 billion in market cap but still a sizable firm. We believe both are split candidates and the stocks will surge when management makes the announcements.