It’s hard to believe that generative AI burst onto our radar just 16 months ago, when OpenAI launched ChatGPT. The chatbot showed that AI tech could truly mimic a human response – and that broke everything wide open. AI has become the talk of the town; it’s being used and publicized in everything from search engines to self-driving cars. And one of two true certainties is that the high-tech world will never be quite the same.
The other certainty is that changes of this magnitude bring opportunities for investors. While we think mainly about the customer- and user-facing sides of AI, the investment opportunities frequently come from the back end, with the processing chips and other hardware that makes it possible. AI may be the shiny new thing, but it will stand or fall on the quality of the hardware behind it.
This truth informs two recent AI stock picks from Jim Kelleher, a 5-star analyst rated in the top 1% of Street’s stock pros. Kelleher has delved deeply into the AI computing world to identify the best AI stocks to buy. His conclusion: Nvidia (NASDAQ:NVDA) and Super Micro Computer (NASDAQ:SMCI) stand out as the AI companies that investors need in their portfolios.
As expected, both have experienced substantial share growth in recent months, riding the wave of success in the AI sector. Let’s explore Kelleher’s insights into why he sees these companies as poised for long-term prosperity in this rapidly evolving market.
Nvidia
The first stock on our list is Nvidia, a leading tech company and one of the sector’s Magnificent Seven – the mega-cap giants that powered most of last year’s market gains. Nvidia’s market cap recently broke above $2 trillion, making the chip company the third publicly traded firm to reach that height, behind Apple and Microsoft, and now stands near $2.2 trillion. In just over two months, Nvidia has added just under $1 trillion to its market cap, experiencing a staggering 77% increase in year-to-date share appreciation.
What’s behind Nvidia’s share growth? Simply this: the company is the market’s leading producer of high-capacity, high-performance GPU chips, the processors with the computing capacity to handle the complex computing operations that make generative AI tech possible. Nvidia is the major supplier of these chips for the data center sector, holding a market share of approximately 95% in the key GPUs for this vital computing sector.
In dollar terms, this translated into $18.4 billion in data center business, per Nvidia’s fiscal 4Q24 financial release. That was up 27% from the previous quarter, and up a whopping 409% year-over-year. Overall, Nvidia’s data center sales made up 83% of the company’s total fiscal Q4 revenues.
That total top line came to $22.1 billion, a company record. Quarterly revenues increased by 22% compared to the previous quarter and 265% y/y – and came in $1.55 billion above the forecast. The company’s non-GAAP bottom line, the EPS of $5.16, showed similarly fast growth – it was up 28% from the prior quarter and 486% from the prior year, and was 52 cents better than had been expected. Nvidia reported yet another company record for its full-year fiscal 2024 revenue, of $60.9 billion.
Nvidia’s quarterly outperformance, beating forecasts and its own company records, impressed analyst Kelleher, who was also not fazed by the company’s rapid share price appreciation.
“Nvidia’s current-quarter guidance once again massively exceeded pre-reporting expectations. Given the fact that manufacturing partners cannot currently keep up with demand, Nvidia’s incredible growth actually understates demand for the company’s products… NVDA shares are near peak prices, but have much further to go, in our view, given the company’s positioning within transformational AI technology. We recommend establishing or adding to positions in this preeminent vehicle for participation in the AI economy. We believe that most technology investors should own NVDA in the age of deep learning, AI, and GPU-driven applications acceleration,” Kelleher opined.
Despite Kelleher’s bullish stance on Buy-rated NVDA, there’s a bit of catching up to do. Nvidia shares have surged so rapidly they’ve already surpassed Kelleher’s $850 price target. It remains to be seen whether this top analyst will revise his price target upward in the coming months. (To watch Kelleher’s track record, click here)
Let’s turn our attention now to the rest of the Street, where based on 39 Buys and just 2 Holds, NVDA currently carries a Strong Buy consensus rating. Although with an average price target of $893.86, the analysts project a modest 2% upside over the coming months. (See Nvidia stock forecast)
Super Micro Computer
The next pick from the Argus analyst is Super Micro Computer, a high-end server stack builder based in Silicon Valley. Where Nvidia makes the fast processor chips needed by AI technology, Super Micro builds the server stacks and storage systems that tie those chips together – and make it possible for AI companies to harness their full potential.
Super Micro is capable of designing and building these complex server stacks in-house, and can install them in a wide range of scales to meet the computing and processing needs of any customer. The company’s products are available both off-the-shelf and as custom builds, and Super Micro can even develop unique, ‘one-off’ configurations.
What this comes down to for the customer is simple – Super Micro is the place to go for cutting-edge solutions in the data center hardware market. This is a dynamic segment of the high-end computing field, and Super Micro’s products have a wide range of applications. The company’s stacks can be found supporting public and private clouds, Edge/5G systems, data centers – and AI firms of all sorts. Those last, especially, make good use of Super Micro’s ability to support high-capacity computing, with the speed needed in generative AI technology.
On the physical side, just looking at the hardware and the physical plant, this is all made possible by Super Micro’s impressive facility footprint. The company has over 6 million square feet of factory floor space in its US and international manufacturing facilities. And on the financial side, Super Micro’s last fiscal year, 2023, saw total revenues of $7.2 billion.
In more recent results, the company’s last quarterly report covered the period that ended on December 31 – the company’s fiscal 2Q24. That quarter showed $3.66 billion in revenues, up from $2.12 billion in the previous quarter – and up from just $1.8 billion in the prior-year quarter. The fiscal 2Q24 revenues were also $400 million better than had been expected. Super Micro earned a bottom line of $5.59 per share in the quarter, based on non-GAAP measures; and EPS total was 43 cents per share above the forecast.
With strong customer demand and solid financial performance, the impressive 301% year-to-date gain in Super Micro’s share price is a testament to its promising outlook.
Turning again to top analyst Kelleher, we find that he is upbeat about those share gains – and does not believe that we have seen the end of it.
“In our view, Super Micro is a leading computer and server provider for the age of generative AI… Despite the explosion in the stock price, valuations for SCMI have not soared out of sight. Repeating the pattern of Apple, Amazon, and most recently Nvidia, Super Micro’s revenues are growing much more rapidly than its costs, creating an environment for meaningful earnings growth. The company’s significant operating leverage on its fast-growing sales base is driving margin expansion and leading to rapid EPS acceleration. Although the SMCI shares are not inexpensive, we believe prospects for near-term and long-term growth justify investment in the shares at current levels,” Kelleher explained.
Looking ahead, the analyst gives SMCI stock a Buy rating to launch his coverage, and sets a price target of $1,350, implying a gain of 18% on the one-year horizon. (To watch Kelleher’s track record, click here)
Kelleher is highly bullish, but his peers are holding back slightly. The stock has a Moderate Buy consensus rating, based on 10 recent reviews that break down to 6 Buys, 3 Holds, and 1 Sell. The stock’s fast appreciation has sent it soaring over the average price target; SMCI stands at $1,140, while the $876.70 average price target implies 23% downside from current levels. (See SMCI stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
