Few stocks outperformed Nvidia (NASDAQ: NVDA) in 2023, but one notable exception was Super Micro Computer (NASDAQ: SMCI), often referred to as Supermicro. With the stock edging out Nvidia by gaining 246% versus Nvidia's 239% in 2023, investors might be surprised to hear that Supermicro could still be a strong buy.
However, after digging into the company, it's clear it still has a long runway. Furthermore, it can be purchased for a reasonable price -- something Nvidia cannot say.
Supermicro makes highly configurable servers tailored to any need
The reason Nvidia grew so much in 2023 was the massive demand for its graphics processing units (GPUs), which are perfect for processing large workloads.
In 2023, artificial intelligence (AI) took off, causing a huge demand for Nvidia's products. However, companies can't just buy a GPU or two and call it a day. Instead, they buy hundreds or thousands of these units and connect them to create a supercomputer.
Most companies don't have the expertise to do this properly, so they outsource server design and production to other suppliers, which is where Supermicro fits in. Its servers are highly customizable and can be tailored to any workload size or focus; it has servers specializing in AI, engineering simulation, and drug discovery, among other purposes.
And it works closely with Nvidia to squeeze out every bit of performance possible from its GPUs.
So, with Supermicro benefiting from the same trend as Nvidia, it makes sense as an investment alternative to the latter. But its stock can be had for a more reasonable price.
Supermicro trades at a discount to Nvidia for a good reason
One of the gripes with Nvidia is that it trades at a premium: 65 times trailing earnings and 40 times forward earnings. Those are high expectations, and it doesn't leave much room for error if the company doesn't hit projections.
On the flip side, Supermicro has a fairly reasonable valuation right now, especially when you focus on forward earnings.
SMCI PE ratio data by YCharts; PE = price to earnings.
Supermicro is expected to grow rapidly this year as the demand Nvidia experienced for its GPUs is translated into the next product in the value chain: Supermicro's servers. This will help it, along with its goal of achieving $20 billion in annual revenue (its current trailing-12-month total is $7.4 million).
However, one area Supermicro doesn't have an edge over Nvidia is with its margins. Because Supermicro is assembling products and not creating them, it doesn't have as much control over the prices it charges.
SMCI gross profit margin data by YCharts.
Furthermore, its technology isn't that innovative. Anyone could launch a business that creates servers with GPUs, but starting a new GPU business from the ground up would be nearly impossible. As a result, there is some risk in Supermicro's stock since it faces stiff competition from IBM and Hewlett Packard Enterprise.
So, should that discourage investors from taking a position in Supermicro's stock? I don't think so. AI proliferation is a rising tide lifting many companies, although first-tier producers like Nvidia could benefit the most, which is why the stock has a huge premium.
Supermicro might not be able to control its destiny, but it sits at the crossroads of a generational technological shift, making it a great investment right now that can be purchased at a reasonable price.
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Keithen Drury has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends International Business Machines and Super Micro Computer. The Motley Fool has a disclosure policy.
