Many stocks tied to artificial intelligence have experienced significant price action over the last year. Some surged to all-time highs and kept moving higher, while others pulled back as investors tempered their expectations about the future.
Although many AI stocks will not experience massive surges, some are well-positioned for considerable growth. Investors seeking those with the potential for such increases may want to consider stocks like Super Micro Computer (NASDAQ: SMCI) and Advanced Micro Devices (NASDAQ: AMD).
1. Super Micro Computer
Although Supermicro is still down more than 50% from its peak in March, it has experienced a fantastic run-up of more than 3,000% over the last five years.
The manufacturer of technology hardware has been in business since 1993 and began trading on the market in 2007. Nonetheless, it spent most of its existence in relative obscurity, known only to those in the tech industry.
Its server technology only became more popular as more computing workloads shifted to the cloud. That trend accelerated during the COVID-19 pandemic, leading to increases in its stock. Supermicro was one of the few tech stocks that rose during the 2022 bear market.
Still, the largest chunk of its rise began in the spring of 2023, when investors discovered that Nvidia's AI chips powered Supermicro's servers. Allied Market Research forecasts a compound annual growth rate of 38% for the AI chip market through 2032. That anticipated growth has become a catalyst for Supermicro, lifting its stock from just $82 per share at the beginning of 2023 to a peak of $1,229 per share less than 15 months later.
Although the stock has since pulled back, the popularity of its servers has boosted its financials. It reported $15 billion in revenue in the first six months of 2024, a 110% increase compared to the same period in 2023. The rising cost of sales has weighed on its profitability. However, the $1.2 billion in earnings it reported in the first half of 2024 was still 89% higher than prior-year levels.
Moreover, the pullback may have created an excellent opportunity for new investors to pick up shares. Investors can now buy Supermicro stock at 31 times earnings, and with its massive growth, its price/earnings-to-growth (PEG) ratio is only 0.4, indicating that the market has not fully priced the company's growth potential into the stock.
Given the level of demand for its servers, Supermicro's growth is unlikely to slow anytime soon. And given its current low PEG ratio, now is probably an excellent time to add shares.
2. AMD
AMD, like most other chip stocks, was overshadowed by Nvidia due to that company's massive lead in the AI chip market. While no rival is likely to overtake Nvidia soon, AMD may be the one with the best shot to become the No. 2 company in that niche.
Late last year, AMD debuted its MI300 series of AI chips. While Nvidia countered with a release of its own, AMD moved to boost its capabilities in this area. It recently completed its acquisition of Silo AI, the largest AI lab in Europe. It also recently inked a deal to buy ZT Systems, an AI infrastructure provider. These additions should improve AMD's competitiveness in the data center AI market, helping it close some of the technical gap with Nvidia.
The data center segment, which includes its AI chips, increased its revenue in the first half of 2024 by 98% year over year, compared to just 6% growth for the company overall. The segment's $5.2 billion in revenue was 46% of AMD's overall revenue of $11.3 billion in the first half of 2024.
That percentage represents a critical change for AMD. In the first half of 2023, the data center segment provided 24% of AMD's revenue, a smaller share than its gaming and embedded segments. Today, with gaming and embedded reeling from sharp sales plunges, the data center segment is an increasingly dominant part of the company.
If Nvidia's history is any indication, this trend may continue for AMD. In the first quarter of Nvidia's fiscal 2025 (which ended April 30), the data center segment delivered 87% of company revenue, a profound change from two years before when data center segment sales just barely edged out revenue from gaming. This pattern suggests that AI chips could also become AMD's dominant focus in the near future.
For now, AMD's P/E ratio is 189 -- but it only recently returned to profitability, making that a misleading metric to use to gauge its valuation. Its price-to-sales (P/S) ratio of 11 is far below Nvidia's 40 sales multiple. Assuming its fast-growing data center revenue continues to grow as a share of the company's revenue, it could bring about the accelerated growth that will draw more investors into AMD stock.
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Will Healy has positions in Advanced Micro Devices and Super Micro Computer. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.
Prediction: These 2 Artificial Intelligence (AI) Stocks Are About to See Massive Growth was originally published by The Motley Fool