As artificial intelligence (AI) continues its march through industries, the hunger for resilient server infrastructure capable of wrangling complex algorithms is intensifying. This shift towards intelligent machines is not just a trend; it’s a revolution remodeling the AI server terrain.

Projections suggest the AI server realm will burgeon at an eye-popping 18% CAGR between 2024 and 2032. This surge foretells a deep-seated integration of AI across sectors like healthcare, finance, cloud computing, edge computing, and data analytics, all clamoring for potent computational prowess.

The climbing interest in AI server equities is proving fruitful not only for tech heavyweights like Hewlett Packard Enterprise Company (HPE) but also reigniting the fortunes of lesser-known entities like Super Micro Computer (SMCI) – both poised to ride this burgeoning wave.

Let’s delve into the details of these two stocks to discern the superior investment proposition.

The Ascendancy of Super Micro Computer Stock

Based in San Jose, California, Super Micro Computer (SMCI) engineers and crafts high-powered server and storage solutions grounded in modular and open design principles, catering to clients in the U.S. and abroad.

This server manufacturer, with a market cap of $56.8 billion, found itself inducted into the S&P 500 Index recently, ousting household appliance maven Whirlpool (WHR) on Mar. 18.

Following its S&P 500 debut, SMCI surged in after-hours trading on Mar. 1 and spiked an impressive 18.7% on Mar. 4. Despite a recent dip triggered by the company’s move to secure $1.75 million through equity issuance, SMCI’s shares soared a jaw-dropping 788% over the past year, dramatically outpacing the S&P 500’s 25.7% gain.

Trading at 51.25x forward earnings, Super Micro Computer commands a significantly higher valuation than its close rivals and its own 5-year average of 13.49. The stock also appears lofty in terms of price-to-cash flow and price-to-sales ratios, towering above industry peers at 83.28x and 7.93x, respectively.

The investment community witnessed a sharp uptick in Super Micro Computer shares subsequent to its stellar earnings announcement on Jan. 29. In fiscal Q2, the company’s total revenue surged 103% year-over-year to $3.66 billion, eclipsing Wall Street anticipations by 12.5%. Notably, its adjusted EPS of $5.59 outstripped analyst estimates by 8.3%.

Management credits this extraordinary growth to surging demand and optimized supply of graphics processing units (GPUs) and other vital system elements. The hunger for Super Micro’s premier AI platforms, notably the LLM-optimized NVIDIA HGX-H100 solutions, AI inferencing systems, and mainstream computing solutions, has been pivotal.

Looking onward, robust demand is set to boost average selling prices, fueling sales growth. With a robust product pipeline and an expanding clientele, Super Micro Computer is primed for sustained financial vigor and a climb in market share.

Estimations peg Super Micro Computer’s Q3 revenue between $3.7 billion and $4.1 billion, symbolizing a staggering 189% to 220.3% year-over-year leap. Full-year revenue is anticipated to more than double, ranging from $14.3 billion to $14.7 billion. Analysts tracking SMCI anticipate an adjusted EPS of $20.24 for fiscal 2024, a robust 86.4% uptick over the prior year.

The overall sentiment around SMCI leans towards a consensus “Moderate Buy”. Out of the 12 analysts inspecting SMCI, eight vouch for a “Strong Buy,” three advise to “Hold,” and one presents a “Strong Sell” recommendation. While the average price target for SMCI sits at $868.64 below the current price, the lofty target of $1,350, granted by Argus Research in March, implies a 37.9% upside potential.

Recently, Northland Capital Markets’ Nehal Chokshi spruced up the price target for the stock from $925 to $1,300, suggesting a 28% upside while maintaining an “Outperform” score. Identifying Super Micro as the “branded server market-share leader,” the analyst envisions the company cornering a 16% slice in the generative AI server market estimated at $560 billion.

The Scenario with Hewlett Packard Enterprise Stock

Established in Texas, Hewlett Packard Enterprise Company (HPE) delivers solutions enabling customers to seamlessly harness, dissect, and act on data across the globe. It offers all-purpose servers, storage items, networking solutions, and professional services, targeting commercial entities and large enterprises. Currently, its market cap stands at $23 billion.

Over the previous 52 weeks, HPE generated returns of 11.1%, trailing behind both SMCI and the S&P 500. The company doles out an annual dividend of $0.50 per share, yielding 2.8% based 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 metric. However, the firm’s growth outlook fails to justify even this discounted valuation against industry benchmarks. Analysts envisage the company’s EPS to expand at a mere 2.7% rate over the next 3-5 years, resulting in a relatively high forward PEG ratio of 3.32x compared to SMCI’s 0.92 PEG ratio.

HPE issued mixed fiscal Q1 results in February and divulged a tepid forecast for the second quarter. In Q1, net revenue of $6.8 billion exhibited a 13.5% dip year-over-year and an 8% decline sequentially, falling short of both analysts’ consensus projections and the company’s own guidance bracket of $6.9 billion to $7.3 billion. The topline contraction stemmed from reduced network requirements, deferred GPU orders, and inadequate GPU support. Additionally, server-generated revenue dipped by 23% year-over-year to $3.4 billion.