Nvidia (NASDAQ: NVDA) has been one of the best stocks to own in the artificial intelligence (AI) race so far. The company’s revenue has tripled year over year in recent quarters, sending the stock up 149% in the first half of 2024.
At these lofty share prices, Nvidia’s valuation looks stretched. The stock’s forward price-to-earnings ratio was less than 30 to start the year, but it now trades at a more expensive 45 times this year’s consensus earnings estimate. Nvidia might experience enough growth to push the stock higher, but there’s also a chance that near-term demand is already baked into the share price, which could limit the stock’s gains through the end of the year.
The good news is that Nvidia isn’t the only AI stock beating the market. Nvidia has benefited from tight supply of AI chips, but as supply improves, it could drive more demand for AI servers, and the stocks of these companies trade at more reasonable valuations, which could set up superior returns in the near term.
Here are two AI server stocks that could outperform Nvidia for the rest of the year.
1. Super Micro Computer
Super Micro Computer (NASDAQ: SMCI) stock has outperformed Nvidia in 2024, up 188%. It sells rack-mount systems for data centers. Because of its exposure to the broader demand for AI chips, Supermicro (as it is also known) is a solid alternative to Nvidia.
Supermicro sells into several markets, including 5G connectivity and edge computing. But demand for its plug-and-play rack systems that feature data center chips from Nvidia and Advanced Micro Devices are key drivers of its growth right now. Revenue surged 200% year over year last quarter, which mirrors Nvidia’s growth.
Selling server systems is a competitive market, but it’s encouraging to see Supermicro growing faster than the industry. It maintains close relationships with suppliers like Nvidia, which helps the company deliver innovative solutions before competitors. It’s currently pushing the adoption of direct liquid cooling solutions, which it has developed for years, to better manage the heat generated from AI computing systems.
If it continues to outpace the rest of the server industry, the stock could have substantial upside. Wall Street analysts expect Supermicro’s earnings per share to grow at an annualized rate of 46% over the next several years — higher than the 33% estimate for Nvidia.
Moreover, Supermicro stock also offers better value than Nvidia. Its current forward price-to-earnings (P/E) ratio is 35 — lower than the 45 forward P/E multiple for Nvidia. Investors are getting more earnings growth for a lower price with Supermicro — a recipe for superior returns.
2. Dell Technologies
Dell Technologies (NYSE: DELL) shares are up 80% year to date, but the company’s shares could outperform Nvidia for the rest of the year due to accelerating demand for the company’s AI servers.
Dell generates most of its revenue from client solutions, which include sales of PCs, but infrastructure solutions is its fastest-growing business, with revenue up 22% year over year last quarter. AI server shipments more than doubled over the year-ago period. Over the last year, revenue from AI servers exploded from zero to $1.7 billion, and it’s just getting started.
Sales of AI servers are weighing on Dell’s gross margin, but the robust revenue growth expected in the AI server business could support substantial earnings growth to send the stock higher over the next few years.
The company’s AI server backlog grew approximately 31% in the last quarter to $3.8 billion. That increase might reflect new business from Tesla, according to Evercore ISI analyst Amit Daryanani. Dell seems to be in a strong competitive position, as the analyst believes that Dell won a larger amount of server business with the electric vehicle maker than Supermicro.
Wall Street analysts project earnings to grow 12% annually over the next several years, and those estimates might increase further once Dell’s PC business recovers. The stock’s forward P/E of 18 looks attractive against the potential for accelerating earnings growth and could provide superior returns.
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John Ballard has positions in Advanced Micro Devices, Nvidia, and Tesla. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, and Tesla. The Motley Fool has a disclosure policy.
Nvidia Stock Is Up 149% This Year. Here Are 2 Stocks That Could Outperform It the Rest of 2024. was originally published by The Motley Fool
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