There is a lot you can do with $1,000. But if you want to get a step closer to sustainable wealth, consider putting that money to work in the stock market. The burgeoning generative artificial intelligence (AI) industry gives investors an excellent opportunity to bet on a megatrend that may eventually rival the internet in its impact on global productivity.
Let’s explore why Super Micro Computer (SMCI -1.86%) and Advanced Micro Devices (AMD -2.16%) look like solid long-term bets.
Image source: Getty Images.
Super Micro Computer
Popular consumer-facing AI apps like OpenAI’s ChatGPT rely on a vast supply chain of enabling infrastructure. And while chipmakers like Nvidia or AMD produce the graphics processing units (GPUs) needed to train and run these algorithms, Supermicro supplies the computer servers that make these chips usable for the end client. The company’s business is booming as demand for AI hardware continues to accelerate.
Third-quarter revenue jumped a respectable 20% year over year to $4.6 billion, helped by demand for Nvidia’s new Blackwell GPUs and Supermicro’s proprietary liquid cooling solutions designed to help clients prevent their massive data centers from overheating.
As a middleman in the AI hardware industry, Supermicro doesn’t have the strongest economic moat. Its AI servers face stiff competition from foreign rivals in lower-cost nations like Taiwan (Inventec, for example). However, Supermicro’s extensive U.S. manufacturing footprint will allow it to benefit from made-in-America policies and incentives, which include tariffs and tax benefits for domestic production under the recently signed spending bill.
With a forward price-to-earnings (P/E) multiple of just 16, Supermicro shares are remarkably affordable compared to the S&P 500 index average of 24 and alternative AI hardware company Nvidia, which trades for 38 times forward earnings.
Advanced Micro Devices
Like Supermicro, AMD operates on the hardware side of the AI industry, competing with its main rival, Nvidia, to produce off-the-shelf hardware solutions for training and running AI algorithms. While AMD is in a distant second place (with an estimated market share of just 14.5% in AI chips compared to Nvidia’s 85.2%), its more diversified business model could give it protection against a potential AI industry downturn.
In some ways, Nvidia has become the victim of its own success. In the first quarter, its data center segment represented a whopping 89% of total revenue, making the company a one-trick pony. On the other hand, AMD gets just half of its sales from its data center segment. And AMD still enjoys a healthy contribution from different business verticals like its client segment (CPUs for laptops) and gaming hardware.
That said, AMD’s data center segment will be its long-term growth engine as the company competes with its larger rival by offering better value for money. First-quarter revenue jumped 36% year over year to $7.4 billion, driven by sales of its new EPYC CPU and Instinct GPU chips, designed to handle advanced AI workloads. While net income grew 55% year over year to $1.57 billion, the stock is a little pricey with a forward P/E of 39.
Which stock is best for you?
Supermicro and AMD are both great picks for AI-focused investors seeking alternatives to Nvidia in the hardware side of the industry. But Supermicro looks like the better pick because of its rock-bottom valuation and potential to benefit from the federal protectionist economic policies. While AMD also looks like a winner, it already trades at a significant premium over the alternatives.
Will Ebiefung has positions in Super Micro Computer. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.
