As for companies, Super Micro Computers (SMCI -0.86%) and Dell Technologies (DELL 0.48%) were both once thought to have low-growth traditional server sales. But in recent years, its exposure to the rapidly growing AI market has improved its financial performance, which has also boosted its stock price.
Over the past three years, Super Micro Computer’s stock price, known as Supermicro, has increased 1,230% as it sold more dedicated AI servers. Dell’s stock price rose more than 140%, thanks in part to the company’s rollout of more AI servers.
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Supermicro is growing much faster than Dell, but as it grapples with declining gross margins, troubling allegations from short sellers, and rumors of an ongoing Department of Justice (DOJ) investigation. The company’s stock price has halved in the past three months. Dell’s stock, which didn’t face any of these problems, fell just 8%.
Will Dell continue to outperform Supermicro in the near future as AI becomes more dominant?
Supermicro still has a lot to prove
According to CSI Market, Supermicro controlled just 6% of the global server market at the beginning of 2024, while Dell led the market with a 58% share. But Supermicro has carved out a niche of its own by selling high-performance water-cooled servers for demanding computing tasks. That made the company an ideal partner for Nvidia, supplying Supermicro with high-end data center GPUs to help produce dedicated AI servers.
Supermicro’s partnership with Nvidia was not exclusive, but it established a first-mover advantage by launching its first AI servers before Dell and other peers. These announcements coincide with rapid growth in the generative AI market, with Supermicro’s revenue more than quadrupling from $3.6 billion in fiscal year 2021 (ending June 2021) to $14.9 billion in fiscal year 2024. Earnings per share (EPS) also increased almost 10 times. . Currently, AI servers account for more than half of our revenue.
But Supermicro’s rapid growth has led Dell, Hewlett-Packard Enterprise, and other major server manufacturers to ramp up production of their own Nvidia-powered AI servers. Mizuho Securities analyst Vijay Rakesh recently predicted that due to pressure, Supermicro’s share of the emerging AI server market will decline from about 80-100% in 2022-2023 to about 40-50% in 2024. . Perhaps that’s why the company’s gross margin contracted quarter-over-quarter and year-over-year in the most recent quarter.
As Supermicro grapples with these challenges, Hindenburg Research, a prolific short seller, issued a report on August 27 that claims the company has “significant accounting, governance, and compliance issues.” Announced. These accusations reportedly triggered a new Justice Department investigation, but the agency has neither confirmed nor denied these reports. Supermicro management said the Hindenburg report “contains false or inaccurate statements about our company, including misleading representations of information we have previously shared publicly.” Little additional information has emerged since the publication of the report and Supermicro’s initial response.
Analysts currently expect Supermicro’s revenue and EPS to rise 87% and 47%, respectively, in fiscal 2025. That’s an incredible growth rate for a stock trading at 16 times forward P/E, but the company’s valuation could remain compressed until the bears quiet down. And we will overcome all the challenges at hand.
Dell continues to grow slowly but steadily
Dell sells a wide range of PCs, PC peripherals, servers, and data storage products. In its most recent quarter, it generated 12% of its revenue from dedicated AI servers, but much of that growth was offset by a slowdown in the PC market over the past two years. Macro headwinds led many enterprise customers to curb spending, and sales of storage products also slowed.
Dell’s revenue and adjusted EPS for fiscal year 2024 (ending February 2024) decreased 14% and 6%, respectively, to address these challenges. But looking ahead, the company expects a “return to growth” in fiscal 2025 as the PC market warms, ramps up production of dedicated AI servers, and eventually data centers upgrade their storage devices again. are. Analysts expect the company’s revenue and adjusted EPS to both increase about 10% for the year.
Over the long term, Dell will increase annual revenue by 3% to 4%, increase adjusted EPS by at least 8%, and return more than 80% of adjusted free cash flow (FCF) to stock buybacks and investors. I hope so. Dividend. The company’s stock looks cheap at just 13x forward earnings, has a decent expected dividend yield of 1.4%, and has repurchased about 8% of its own shares over the past three years.
These strengths make Dell a more stable investment than Supermicro, and it is less exposed to short-term pressure from short sellers and regulators. The company’s AI server shipments have also increased over the past year, indicating that the company is gradually chipping away at Supermicro’s dominance in the AI server market.
Better buy: Supermicro
Dell still plays a diversified role in the PC and data center markets, but is not valued as attractively as Supermicro. While Supermicro’s stock price may remain in the penalty box until it resolves its short-term issues, it could still be a great long-term play in the still-nascent AI server market.
Dell, HPE, and others may flex their muscles against Supermicro, but there could be plenty of room for all of these companies to thrive without stepping on each other’s toes. So if you’re willing to take more risk for higher returns in the coming years, you’re better off buying Supermicro. Dell takes a safer strategy, but the returns may be lower.
