The artificial intelligence (AI) server market has boomed over the past year as cloud companies and data center providers pour money into building AI infrastructure and developing generative AI applications. This is explained by server manufacturers such as: Dell Technologies (NYSE:Dell) and super microcomputer (NASDAQ:SMCI) Their stock prices have exploded.
While Dell's stock price has nearly tripled over the past year, the company, also known as Supermicro, has soared a whopping 873%. What's surprising, however, is that both companies continue to trade at attractive valuations, despite their incredible stock price increases over the past year.
So, if you had to buy one of these two AI server plays right now, which would be the better choice? Let's find out.
For Dell Technologies
Dell Technologies is a major player in the global server market. According to third-party estimates, the company's share of the entire server market will reportedly reach 19% by the end of 2022. So it's no surprise to see why the company would benefit from the growing demand for AI servers.
In the fourth quarter of 2024 (ending February 29, 2024), Dell reported that orders for AI-optimized servers increased approximately 40% sequentially. The company sold $800 million worth of AI servers last quarter. That number should continue to rise, as Dell's AI server backlog nearly doubled quarter-over-quarter to $2.9 billion. The AI server market is predicted to reach $150 billion in annual revenue in 2027, compared to $30 billion in annual revenue last year, and there is plenty of room for Dell to grow in this market. .
It's worth noting that AI servers currently represent a small portion of Dell's overall business. The company's fiscal fourth quarter revenue was $22.3 billion, down 11% from the year-ago period. The year-over-year decline can be attributed to Dell's Client Solutions division, which sells personal computers (PCs) and workstations.
The PC market wasn't very healthy last year, with shipments down nearly 14% from 2022. This explains why Dell's Client Solutions revenue fell 12% year over year last quarter. The good news is that with the adoption of AI-enabled PCs, this sector could return to growth in his 2024. Market research firm Canalys predicts that shipments of AI-equipped PCs will surge from 48 million units this year to 205 million units by 2028.
Therefore, Dell has two favorable AI-related catalysts that are likely to help it recover its growth starting this fiscal year. The company generated $88.4 billion in revenue in fiscal 2024, down 14% from the previous year. However, as the chart below shows, revenue is expected to start increasing from FY2025.
super microcomputer case
Super Micro Computer is a much smaller company than Dell. Revenue for fiscal year 2023 (ending last June) was just $7.1 billion. But being small means selling AI servers is a game-changer for Supermicro.
Last quarter, the company generated more than 50% of its total revenue from sales of AI-related server solutions. This explains why the company's revenue this fiscal year is on track to more than double his $14.5 billion. If half of Supermicro's 2024 fiscal year revenue comes from sales of his AI servers, at least his $7.2 billion in sales will come from this fast-growing market. This means AI Server has a higher quarterly revenue run rate compared to Dell.
It's also worth noting that revenue could double from current levels, given that Supermicro is expanding its manufacturing operations to support more than $25 billion in annual revenue. The company is rapidly increasing the utilization rate of its current manufacturing capacity. “Production utilization across our U.S., Netherlands and Taiwan facilities is approximately 65% and is rapidly filling up,” Super Micro management said in a January earnings call.
So it's no surprise to see why the consensus estimates are that Supermicro's revenue growth is expected to remain strong in FY2024 and beyond.
It wouldn't be surprising if Supermicro beats consensus estimates for FY2026. This is because, in the words of management, “next-generation AI and CPU platforms are driving strong demand from leading data centers, emerging cloud service providers, enterprise/channel, and edge/IoT/telco customers. Because we continue to drive level design success, orders and backlogs.” ”
verdict
We've already noted that Supermicro's smaller size is an advantage, as demand for Supermicro's AI servers is driving much stronger growth compared to Dell. This explains why the analyst predicts that Supermicro's revenue will grow at an annualized rate of 48% over the next five years. Meanwhile, Dell is expected to have almost negligible annual profit growth over the next five years.
Of course, Dell's fortunes could change, and its profit growth rate could accelerate, if its AI server business expands and AI-powered PCs begin to drive growth in its client business. That's why investors looking for a potential AI winner trading at an attractive valuation may want to consider buying Dell, which trades at a forward P/E of 15.7x, lower than Supermicro's forward P/E of 36x. You might think so.
However, we see Supermicro growing at a much faster pace, which could justify its higher valuation as a result. Therefore, growth-oriented investors may consider buying Supermicro over Dell. Because Supermicro's fast-growing nature could lead to healthier returns in the long run.
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Harsh Chauhan has no position in any stocks mentioned. The Motley Fool has no position in any stocks mentioned. The Motley Fool has a disclosure policy.
“Better Artificial Intelligence (AI) Stocks: Dell vs. Super Micro Computers” was originally published by The Motley Fool.