Certain Wall Street analysts are predicting big gains for Super Micro Computer and Snowflake shareholders.

The S&P 500 (^GSPC 0.80%) advanced 25% over the past year, and excitement about artificial intelligence (AI) was a major source of momentum. Indeed, AI chipmaker Nvidia alone was responsible for 18% of those gains, according to Morningstar.

That staggering statistic notwithstanding, there are plenty of opportunities beyond Nvidia. For instance, the following Wall Street analysts see significant upside in Super Micro Computer (SMCI -5.25%) and Snowflake (SNOW -3.38%), two companies well position to monetize AI.

  • Loop Capital analyst Ananda Baruah has set Super Micro Computer with a price target of $1,500 per share, implying 91% upside from its current price of $784 per share.
  • Morgan Stanley analysts led by Keith Weiss have set Snowflake with a bull-case price target of $345 per share, implying 154% upside from its current price of $136 per share.

Investors should never put too much confidence in price targets, but Supermicro and Snowflake certainly warrant further consideration. Here are the important details.

1. Super Micro Computer

Super Micro Computer designs and manufactures computing platforms for enterprise and cloud data centers. Its products include high-performance servers and storage solutions optimized for artificial intelligence (AI) applications. In fact, Supermicro is the leading manufacturer of AI servers, due in part to its in-house design capabilities and building-block development strategy.

To elaborate, because Supermicro can quickly equip its platform building blocks with the latest chips and interconnects from suppliers like Nvidia and Intel, the company is often first-to-market with new technologies. CEO Charles Liang highlighted that advantage on the most recent earnings call. “We provide optimized AI solutions at scale, offering a time-to-market advantage and shorter lead times over our competition.”

Supermicro’s building-block approach to product development also affords clients a great deal of flexibility in designing custom solutions. Specifically, because its platform building blocks come together in so many different combinations, Supermicro allegedly offers the broadest and deepest portfolio of advanced server and storage solutions in the IT industry.

The upshot of that advantage is that Supermicro grew revenue about five times faster than the industry average during the last year, meaning it gained substantial market share. In April, Tom Blakely at KeyBanc estimated in April that Supermicro accounted for 10% at the time, but he believes its market share will reach 23% by the end of 2024.

Going forward, Wall Street expects Supermicro to grow earnings per share at 47% annually over the next three to five years. That estimate seems reasonable given that the AI server market is projected to grow at 27% annually through 2029. Assuming Wall Street is correct, the current valuation of 44 times earnings looks rather cheap because it gives a PEG ratio below 1.

Investors shouldn’t count on a 91% return in the next year, but Supermicro shares are reasonably priced and the stock has a good shot at beating the S&P 500 over the next three to five years.

2. Snowflake

Snowflake lets businesses store, transform, and analyze data on a single platform that runs on all three major public clouds. Its platform also features a data sharing marketplace, which creates a network effect that makes Snowflake increasingly valuable to customers as more data is uploaded.

Snowflake is unique in its ability to offer those capabilities on a single platform that spans multiple public clouds, according to Morningstar. That product differentiation means the company is well positioned to benefit as businesses spend more on data analytics, a market forecasted to expand quickly in the coming years. Specifically, sales across data lakes and data warehouses are forecasted to increase at 24% annually through 2030.

Snowflake reported mixed financial results in the first quarter. Its customer count climbed 21% to 9,822 and the average existing customer spent 28% more. In turn, revenue rose 33% to $829 million, but non-GAAP net income dropped 4% to $52 million.

Management also adjusted its full-year guidance in a somewhat mixed fashion. Revenue growth is now expected to be 24% in fiscal 2025 (ends in January 2025), up from the previous estimate of 22%. But the non-GAAP operating margin is projected to be 3%, down from the previous estimate of 6%.

The combination of the first-quarter decline in net income and the reduction in full-year margin guidance has investors worried. Snowflake shares have slumped 17% since the company reported earnings on May 22. But management attributes those setbacks to increased GPU expenses related to its artificial intelligence roadmap. Tht means margins should expand as new AI products like Cortex reach scale.

Cortex lets users analyze data with large language models and machine learning models designed for tasks like summarization and forecasting. Snowflake is also integrating other generative AI features, such as Snowflake Copilot for coding, Document AI for data extraction, and Universal Search for finding database objects. Cortex became generally available in May, but the other AI features are still in preview, meaning the company has hardly tapped its potential where AI is concerned.

Looking ahead, Wall Street expects Snowflake to grow sales at 23% annually over the next three years. That estimate seems low given the tremendous demand for data analytics and AI solutions. Nevertheless, even if the consensus estimate on Wall Street is correct, the current valuation of 14.9 times sales seems reasonable. In fact, the stock has never been cheaper.

I doubt Snowflake will produce triple-digit returns over the next year, but investors that buy a small position today could certainly beat the market over the next three to five years.

Source link