Although artificial intelligence (AI) is widely considered to be a software program, it requires hardware to develop and power it. This leads to investors seeking a “pick-and-shovel” style of investing, as these companies sell the tools necessary to drive these processes (similar to various gold rushes throughout U.S. history). (Just as many companies sold picks and shovels to gold miners at the time.)
Two of the major “picking” actions in the AI market are: Nvidia (NASDAQ:NVDA) and super microcomputer (NASDAQ:SMCI). Both stocks have been growing like rockets since the beginning of 2023, with Nvidia and Super Micro Computer (often referred to as Supermicro) shares up 437% and 1,000%, respectively.
But which one is better to buy now? Let’s check it out.
Nvidia and Super Micro Computers are complementary businesses
While the two companies could be considered “pick-and-shovel” investments, in reality, Nvidia manufactures the shovels and pickheads, while Supermicro assembles the tools and sells them to end users.
Nvidia makes graphics processing units (GPUs) that handle the complex workloads required by AI models. These hardware have been around for a long time, initially used to process game graphics, but have since expanded to include engineering simulations, drug discovery, and training AI models.
When companies want to build supercomputers that harness the power of data through AI, they can do more than just buy one or two GPUs. They buy hundreds and thousands of things. To get the most out of these, you need to place them strategically and connect them to your server. That’s where Supermicro comes in.
Supermicro builds these servers for its clients, offering a highly configurable model that can be tailored to meet end use and computing power expectations. They work closely with his Nvidia to squeeze the most performance out of their servers, which will benefit users in the long run.
But there are clear choices as to which one makes more sense to invest in.
Nvidia is a good investment at these prices
Supermicro relies heavily on Nvidia for its business. If Nvidia chooses to fill GPU orders with other customers, or if the relationship sours, Supermicro’s business will go out of business. These two companies have been partners for a while, so we don’t expect this to happen, but it’s something to keep in mind.
Additionally, Supermicro has strong competition from other server builders such as: hewlett packard and IBMNvidia’s AI GPUs, on the other hand, are in a class of their own.
This greatly skews the bias against Nvidia, but there are other factors at play as well.
Both stocks were undervalued entering 2023, but Supermicro’s stock price was incredibly cheap at just over six times expected earnings.
This is why Supermicro has outperformed Nvidia stock over the past year, but that may soon stop. Currently, Supermicro is more expensive than his Nvidia, so it doesn’t make much sense to buy Supermicro, especially if they are growing at the same pace.
Nvidia’s business model is much better because it has control over its core products, which gives it an edge when evaluating profit margins.
Nvidia is much more profitable than Supermicro, and if I had a choice between two stocks that are evenly priced and growing at roughly the same pace, I would always choose the more profitable one.
Both companies will succeed as AI continues to improve, but I’m excited about Nvidia’s better margins and control over its core products. Super Micro Computer may be a solid company to invest in, but at this price he would be better off choosing Nvidia.
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Keithen Drury has no position in any stocks mentioned. The Motley Fool has a position in and recommends Nvidia. The Motley Fool recommends Super Micro Computers. The Motley Fool has a disclosure policy.
A better AI stock: Nvidia or Super Micro Computer? Originally published by The Motley Fool
