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As artificial intelligence (AI) extends its influence across industries, demand for robust server infrastructure that can handle sophisticated algorithms and applications is growing. This evolving landscape is driving innovation and growth within the AI server arena.
The AI server market is projected to expand at an impressive 18% CAGR from 2024 through 2032. This anticipated expansion indicates a deeper implementation of AI across numerous industries, including healthcare, finance, cloud computing, edge computing, and data analytics, all of which demand high-performance computation.
The rising interest in AI server stocks is not only proving beneficial for traditional tech giants like Hewlett Packard Enterprise Company (HPE), but it’s also reviving shares of lesser-known names such as Super Micro Computer (SMCI) – both of which stand to benefit from this burgeoning market.
Here's a closer look at these two stocks to determine which is a better buy.
The Case for Super Micro Computer Stock
Headquartered in San Jose, California, Super Micro Computer (SMCI) develops and manufactures high-performance server and storage solutions based on modular and open architecture in the U.S. and internationally.
The server manufacturer stock, with its $56.8 billion market cap, was recently added to the S&P 500 Index ($SPX), replacing home appliance specialist Whirlpool (WHR) on Mar. 18.
SMCI jumped in after-hours trading on Mar. 1 after the announcement of the AI server maker’s entry into the S&P 500, and climbed 18.7% on Mar. 4. Despite tumbling in response to the company’s decision to raise $1.75 million through equity offering, shares of SMCI have soared a whopping 788% over the past 52 weeks, significantly outpacing the S&P 500's 25.7% increase.
Super Micro Computer trades at 51.25x forward earnings, significantly higher than its closest peers and its own 5-year average of 13.49. The stock also looks expensive in terms of price/cash flow and price/sales, which stand much higher than its industry peers at 83.28x and 7.93x, respectively.
Super Micro Computer shares experienced a notable uptick after its stellar earnings report on Jan. 29. The company’s fiscal Q2 total revenue increased 103% year over year to $3.66 billion, outstripping Wall Street forecasts by 12.5%. Its adjusted EPS of $5.59 surpassed analyst estimates by 8.3%.
Management attributed this exceptional growth to heightened demand and improved supply for graphics processing units (GPUs) and related key system components. The demand for Super Micro's leading AI platforms, particularly the LLM-optimized NVIDIA HGX-H100 solutions, AI inferencing systems, and mainstream computing solutions, has been instrumental.
Looking ahead, strong demand is poised to drive average selling prices, bolstering sales. Additionally, with a robust product pipeline and expanding customer base, Super Micro Computer is well-positioned for continued strong financial performance and market share expansion.
Super Micro Computer expects its Q3 revenue to be between $3.7 billion and $4.1 billion, reflecting year-over-year growth of roughly 189% to 220.3%. Full-year revenue is projected to more than double, ranging between $14.3 billion and $14.7 billion. Analysts tracking SMCI expect adjusted EPS to be $20.24 in fiscal 2024, up 86.4% year over year.
SMCI has a consensus “Moderate Buy” rating overall. Out of the 12 analysts covering SMCI, eight recommend “Strong Buy,” three suggest “Hold,” and one gives a “Strong Sell” rating. While SMCI’s average price target of $868.64 is lower than the current price, the high price target of $1,350, assigned by Argus Research in March, implies a 37.9% upside potential.
Most recently, Northland Capital Markets’ Nehal Chokshi raised the price target on the stock from $925 to $1,300, indicating a 28% upside, while maintaining an “Outperform” rating. The analyst identified Super Micro as "the branded server market-share leader" and anticipates the company capturing a 16% share in the generative AI server market, estimated at $560 billion.
The Case for Hewlett Packard Enterprise Stock
Texas-based Hewlett Packard Enterprise Company (HPE) provides solutions that allow customers to capture, analyze, and act upon data seamlessly worldwide. It offers general-purpose servers, storage products, networking solutions, and professional services, catering to commercial and large enterprise clients. Its market cap currently stands at $23 billion.
Shares of HPE have returned 11.1% over the past 52 weeks, lagging the returns of both SMCI and the S&P 500. The company pays an annualized dividend of $0.50 per share, yielding 2.8% on its current price.
Priced at 12.81 times forward earnings, Hewlett-Packard Enterprise is currently trading at a 75% discount to SMCI on this basis. However, the company’s growth prospects fail to justify even this lower-than-industry valuation. Analysts expect the company’s EPS to grow at a rate of only 2.7% over the next 3-5 years. As a result, Hewlett-Packard has a relatively high forward price-earnings-to-growth (PEG) of 3.32x, compared to SMCI’s PEG ratio of 0.92.
HPE reported mixed fiscal first-quarter results in February and provided a subdued outlook for the second quarter. Its $6.8 billion in Q1 net revenue decreased 13.5% year over year and 8% sequentially, missing both analysts’ consensus forecast and the company’s own $6.9 billion to $7.3 billion guidance range. The top line declined due to reduced network demands, postponement of GPU orders, and lack of supply support for GPUs. Also, net revenue from servers dipped 23% year over year to $3.4 billion.
In November 2023, Hewlett Packard expanded its collaboration with GPU chip market leader Nvidia Corp (NVDA). This collaboration was expected to enhance HPE's financial performance, particularly in its networking and supercomputing divisions, due to increased demand for Edge AI technology.
However, Hewlett Packard's CEO told investors, "We expect weakness in the networking market to persist, which is likely to impact revenue through fiscal year 2024."
For fiscal 2024, the company anticipates revenue growth to be flat to 2%. Non-GAAP net EPS is expected to arrive between $1.82 and $1.92, while free cash flow is expected to be at least $1.9 billion. Analysts tracking Hewlett Packard expect adjusted EPS to be $1.40 in fiscal 2024, down 9.1% year over year.
Following the earnings report, Stifel Nicolaus dropped HPE's price target to $18 from $20, setting a "Buy" rating for the stock, while Barclays adjusted theirs to $14 with an "Equal Weight" rating. Finally, Wells Fargo downgraded the stock to "Equal Weight" from “Overweight,” lowering the price target from $21 to $17.
HPE now has a consensus “Hold” rating on Wall Street – down from “Moderate Buy” three months ago. Of the 14 analysts covering HPE, one recommends “Strong Buy,” one suggests “Moderate Buy,” and 12 say “Hold.” The Street-high target price of $19.00 implies a meager 6% upside potential.
SMCI vs. HPE: Which AI Server Stock Is a Better Buy Right Now?
SMCI and HPE are both poised to capitalize on this burgeoning trend in the AI server market, but SMCI - with its robust financials, positive outlook, and strong price performance - appears better positioned for continued upside.
Notably, the company’s move to offer 2 million shares at $875 each, despite denting investor confidence, is strategic. Super Micro intends to use the proceeds to support "its operations, including for the purchase of inventory and other working capital needs, manufacturing capacity expansion and increased R&D investments," all of which should help to expand its leadership position in the AI server market.
On the date of publication, Sristi Suman Jayaswal did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
