Generative artificial intelligence (AI) uses large-scale language models and other machine learning models to create text, images, video, audio, and computer code. Use cases range from digital assistants that improve employee productivity to intelligent avatars that make video games more realistic.
Bloomberg Intelligence expects generative AI revenues to grow from $63.5 billion in 2023 to more than $1.3 trillion in 2032. In other words, Bloomberg believes spending on generative AI hardware, software and services will grow 2,040% over the next nine years.
Some analysts predict an even larger market: McKinsey & Company research, for example, predicts that generative AI will eventually contribute $7.9 trillion annually to the global economy. Opportunities like this come along rarely, so investors need to position their portfolios accordingly.
NVIDIA (NASDAQ: NVDA) is a logical stock to own. In fact, I think most investors should have some exposure to chip makers. But Nvidia won't be the only one to benefit, and owning only one AI stock is not a smart strategy. Here's why I think so: Super Microcomputer (NASDAQ:SMCI) These are the best AI stocks to buy right now.
Nvidia dominates the artificial intelligence processor market
NVIDIA's graphics processing units (GPUs) have long been the gold standard for accelerating artificial intelligence and other data center workloads, and attention has certainly increased over the past year, given that NVIDIA's revenue and net income have grown at triple-digit rates for four consecutive quarters. But investors need to understand that NVIDIA hasn't arrived at its recent success unconsciously.
Nvidia has dominated the datacenter GPU market for nearly two decades and has continued to break performance records on MLPerfs, an objective benchmark that measures how fast AI systems can perform AI training and inference tasks, since the test was created in 2018. One reason for its success is the CUDA programming language, which enables Nvidia GPUs (originally built for computer graphics) to accelerate other datacenter workloads.
Nvidia introduced CUDA in 2006, and since then the platform has expanded to include hundreds of frameworks and software libraries that streamline data preparation, model training and AI application development. No other chip maker has a comparable software ecosystem to support it, so Nvidia has naturally emerged as the leader in AI processors. The Wall Street Journal“Nvidia's chips power all the most cutting-edge AI systems, and the company's market share is estimated to be more than 80%.”
The question (if there is one) is valuation. Wall Street expects Nvidia to grow earnings per share at 33% annually over the next three to five years. Divide that by the company's current price-to-earnings multiple of 74, and you get a price-to-earnings-growth (PEG) ratio of 2.2. That's not outrageous. In fact, the multiple is cheaper than the company's three-year average of 3.1, so investors with a high risk tolerance should consider buying a small stake in the stock today.
But I think Super Micro (aka Supermicro) is a better buy right now because its stock price is significantly cheaper and the company stands to gain big as companies invest in generative AI hardware.
Supermicro is gaining market share in artificial intelligence servers
Supermicro builds accelerated computing platforms. The company's portfolio ranges from individual servers and storage systems to full rack solutions designed for enterprise and cloud data centers. The company partners with Nvidia, Inteland Advanced Micro Devices To have the latest chips in the hardware.
Samik Chatterjee JPMorgan Chase He sees Supermicro as “the leading company in the AI computing market.” More importantly, Supermicro is rapidly gaining market share. The company accounted for 10% of AI server sales in the quarter that ended in December, and KeyBanc's Tom Blakely said that figure could reach 23% this year. He also believes Supermicro “has competitive advantages that it can sustain even if it doesn't gain this share in the coming years.”
Blakely points to Supermicro's in-house manufacturing capabilities and unique building-block approach to product development. About half of Supermicro's employees are engineers, and the company does most of its research and development in-house (in Silicon Valley). As a result, Supermicro is able to bring new products to market quickly and efficiently, and its modular approach further enhances that ability.
Specifically, Supermicro is often first to market with new technologies because it can “leverage common building blocks across its product lines to rapidly build a broad portfolio of solutions.” In other words, the company can quickly outfit partially assembled servers with the latest central processing units (CPUs), GPUs, memory and interconnects, often getting to market ahead of competitors.
CEO Charles Liang recently highlighted the benefits, saying, “We deliver optimized AI solutions at scale, with faster time to market and shorter lead times than our competitors.”
Supermicro is trading at a more reasonable valuation than Nvidia.
According to the 650 Group, annual shipments of AI servers are expected to grow sixfold between 2023 and 2028. Supermicro is well positioned to benefit from increased demand due to its market leadership, backed by its in-house engineering capabilities and unique product development approach.
Wall Street expects Supermicro to grow earnings per share at 48% annually over the next three to five years. Dividing that number by the current valuation of 47 times earnings gives the company a PEG ratio of less than 1. To be clear, Supermicro is no hidden gem. In fact, the company has been one of the best-performing stocks of all time. S&P 500 during the first half of 2024. But that valuation is very reasonable, especially when compared to Nvidia's PEG ratio of 2.2.
Should I invest $1,000 in Nvidia right now?
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool property. Trevor Jennewine invests in Nvidia. The Motley Fool invests in and recommends JPMorgan Chase and Nvidia. The Motley Fool has a disclosure policy.
The post Generative AI Revenues Could Rise 2,040%: The Best AI Stock to Buy Now (Hint: It's Not Nvidia) was originally published by The Motley Fool.
