The Bottom Line:
- Bloomberg projects the AI market to reach $1.3 trillion by 2032, with an average annual growth of 42%
- Super Micro Computer (SMCI) and Advanced Micro Devices (AMD) are two promising AI stocks with strong buy ratings and impressive growth
- SMCI has shown rapid sales growth, strong ROIC, and an attractive valuation based on discounted cash flow analysis
- AMD has experienced inconsistent but strong growth, with a projected increase in free cash flow over the next 12 months
- Wall Street analysts see potential upside for both SMCI and AMD over the next 12 months
The Booming AI Market: Projected to Reach $1.3 Trillion by 2032
Explosive Growth Projections for the AI Industry
According to Bloomberg, the AI market is projected to reach a staggering $1.3 trillion by 2032, representing an average year-on-year increase of 42% over the next decade. This explosive growth potential has caught the attention of major players in the industry, with PwC calling it a game-changing $15.7 trillion opportunity.
AI Stocks Poised for Strong Future Performance
Despite recent fluctuations in the stock market, with companies like Nvidia experiencing a 3% dip, the long-term outlook for AI stocks remains promising. Over the past 10 years, Nvidia has seen a remarkable 27,000% increase in value, and Wall Street analysts maintain a strong buy rating for the company. However, this article focuses on four other AI stocks that are expected to perform strongly in the future, all of which currently have buy ratings from analysts.
Evaluating AI Stock Fundamentals and Valuation
To assess the potential of these AI stocks, the article delves into their underlying metrics, including free cash flows, sales growth, and other key indicators. By running each stock through a valuation model, the authors aim to determine their intrinsic value and establish an acceptable buy price based on an investor’s margin of safety. The analysis also takes into account Wall Street’s forecasts for the next 12 months, providing readers with a comprehensive view of the stocks’ growth potential. By presenting three different growth rates (low, medium, and high) in the valuation model, readers can understand the basis for the price targets and make their own estimations based on their long-term growth expectations for these companies.
Super Micro Computer (SMCI): A Promising AI Stock with Strong Fundamentals
Super Micro Computer: A Strong Contender in the AI Hardware Market
Super Micro Computer (SMCI) is a promising AI stock that has demonstrated impressive performance over the past decade, with a 3,602% increase in value over the last 10 years. The company has a strong buy rating from Quant and is currently trading in the mid to upper end of its 52-week range, with a forward P/E ratio of around 38.
While Super Micro Computer’s free cash flow has been inconsistent on a year-over-year basis, it has shown significant improvement in recent years, with strong free cash flow metrics in 2023. The company’s sales growth has been impressive, with nearly double-digit growth year-over-year, reaching 37% in the last four years and 80% on a trailing 12-month basis. Super Micro Computer has increased its top line rapidly, growing from $1.5 billion in 2014 to $7.12 billion in 2023.
Attractive Metrics and Improving Margins
Super Micro Computer’s return on invested capital (ROIC) has been consistently above the 10% threshold, indicating that management is effectively allocating capital. In the last four years, the company’s ROIC was an impressive 33%, with a trailing 12-month ROIC of 16%. Although the company’s operating margin has room for improvement, it has shown an upward trend, reaching its highest level of 11% in 2023.
The company’s balance sheet strength is evident from its net debt to EBITDA ratio. In 2023 and over the next 12 months, Super Micro Computer’s net debt to EBITDA is zero, meaning the company can pay off all its debt net of cash on hand in less than a day.
Valuation and Price Targets
Using a discounted cash flow (DCF) model with three different growth rates (low, medium, and high), the analysis reveals that Super Micro Computer’s intrinsic value ranges from $871 to $1,422, depending on the assumed growth rate. At a medium growth rate of 25%, the intrinsic value is just over $1,000, indicating potential undervaluation and implied upside of 133%.
Applying a margin of safety of 10%, Super Micro Computer would be considered a buy up to $922, based on the medium growth rate assumption. Wall Street analysts have a slightly more optimistic view, with a price target that implies an 18% upside over the next 12 months.
Advanced Micro Devices (AMD): Inconsistent but Impressive Growth Potential
Inconsistent but Promising Growth
Advanced Micro Devices (AMD) has shown inconsistent but impressive growth potential over the past decade, with its stock price increasing by 3,825% over the last 10 years. Despite the cyclical nature of the industry, AMD has demonstrated strong double-digit sales growth in many years, although it experienced a 4% drop in 2023. The company’s free cash flow has improved from negative values between 2014 and 2018 to positive figures in recent years, with a massive growth jump expected over the next 12 months to $3.51 per share.
Mixed Financial Metrics
AMD’s return on invested capital (ROIC) has been inconsistent, meeting the minimum 10% threshold for the majority of the last 10 years but falling to 1% and 2% in the last two years. The company’s operating margin has been mostly positive, although it has started to decline from the highs of 2021. AMD’s free cash flow margin has been above the 5% minimum requirement in recent years, but the company experienced a period of negative free cash flow from 2014 to 2018. However, AMD’s balance sheet strength is evident from its net debt to EBITDA ratio, which has been very strong since 2019, with the company able to pay off all its debt net of cash on hand in less than a day.
Valuation and Price Targets
Using a discounted cash flow (DCF) model with three different growth rates, AMD’s intrinsic value ranges from $61 to $142, depending on the assumed growth rate. At a medium growth rate of 25%, the analysis shows that AMD is trading at a premium, with a current price of $161. For investors looking for a 10% margin of safety, the buy price would be around $128. However, Wall Street analysts have a more optimistic view, with a price target that implies a 19% upside, setting their target at $191.
Wall Street Analysts Predict Significant Upside for SMCI and AMD
Wall Street Sees Significant Upside Potential for SMCI and AMD
Wall Street analysts predict significant upside potential for both Super Micro Computer (SMCI) and Advanced Micro Devices (AMD) over the next 12 months. Despite the recent fluctuations in the stock market and the cyclical nature of the industry, these two AI stocks have demonstrated impressive growth and strong fundamentals, making them attractive investment opportunities in the booming AI market.
Intrinsic Value and Price Targets Reveal Undervaluation
Using a discounted cash flow (DCF) model with various growth rate assumptions, the analysis reveals that SMCI and AMD have the potential to be undervalued at their current prices. For SMCI, at a medium growth rate of 25%, the intrinsic value is just over $1,000, indicating an implied upside of 133%. Applying a 10% margin of safety, SMCI would be considered a buy up to $922. Wall Street analysts have a slightly more optimistic view, with a price target that implies an 18% upside over the next 12 months.
In the case of AMD, the intrinsic value ranges from $61 to $142, depending on the assumed growth rate. At a medium growth rate of 25%, AMD appears to be trading at a premium, with a current price of $161. However, Wall Street analysts have a more bullish outlook, setting a price target of $191, which implies a 19% upside.
Promising Fundamentals and Growth Prospects
Both SMCI and AMD have demonstrated strong fundamentals and growth prospects, despite some inconsistencies in their financial metrics. SMCI has shown impressive sales growth, with nearly double-digit growth year-over-year and a rapidly increasing top line. The company’s return on invested capital (ROIC) has been consistently above the 10% threshold, indicating effective capital allocation by management.
AMD, on the other hand, has experienced inconsistent but impressive growth, with its stock price increasing by 3,825% over the last 10 years. Although the company’s free cash flow and ROIC have been inconsistent, AMD has shown significant improvement in recent years, with a massive growth jump expected in free cash flow per share over the next 12 months.
Comparing SMCI and AMD: Which AI Stock is the Better Investment?
SMCI: Strong Fundamentals and Attractive Valuation
Super Micro Computer (SMCI) has demonstrated impressive performance over the past decade, with a 3,602% increase in value. The company’s sales growth has been remarkable, with nearly double-digit growth year-over-year and a rapidly increasing top line. SMCI’s return on invested capital (ROIC) has consistently exceeded the 10% threshold, indicating effective capital allocation by management.
Using a discounted cash flow (DCF) model with various growth rate assumptions, SMCI’s intrinsic value ranges from $871 to $1,422. At a medium growth rate of 25%, the intrinsic value is just over $1,000, suggesting potential undervaluation and an implied upside of 133%. Applying a 10% margin of safety, SMCI would be considered a buy up to $922. Wall Street analysts have a slightly more optimistic view, with a price target that implies an 18% upside over the next 12 months.
AMD: Inconsistent but Promising Growth Potential
Advanced Micro Devices (AMD) has shown inconsistent but impressive growth potential, with its stock price increasing by 3,825% over the last 10 years. Despite the cyclical nature of the industry, AMD has demonstrated strong double-digit sales growth in many years. The company’s free cash flow has improved from negative values between 2014 and 2018 to positive figures in recent years, with a massive growth jump expected over the next 12 months.
AMD’s intrinsic value ranges from $61 to $142, depending on the assumed growth rate in the DCF model. At a medium growth rate of 25%, AMD appears to be trading at a premium, with a current price of $161. For investors seeking a 10% margin of safety, the buy price would be around $128. However, Wall Street analysts have a more bullish outlook, setting a price target of $191, which implies a 19% upside.
Balancing Risks and Rewards in AI Investments
Investing in AI stocks like SMCI and AMD requires careful consideration of both the potential rewards and the associated risks. While both companies have shown impressive growth and strong fundamentals, the cyclical nature of the industry and inconsistencies in some financial metrics should not be overlooked.
Investors should conduct thorough research and analysis before making investment decisions, taking into account their individual risk tolerance and investment goals. By using valuation models, such as the DCF, and considering various growth rate scenarios, investors can gain a better understanding of the potential upside and downside of these AI stocks. Additionally, keeping an eye on Wall Street analysts’ price targets and recommendations can provide valuable insights into the market sentiment surrounding these companies.
