Nvidia has some advantages over its troubled partner.
Nvidia (NVDA -2.13%) stock has pulled back since the summer as it struggled to meet ever-increasing investor expectations. However, its fall did not compare to that of one of its key partners, Super Micro Computer (SMCI 4.31%), which has faced a string of confidence-rattling events.
Supermicro delayed the filing of its latest 10-K on Aug. 28, a day after short-seller Hindenburg Research released a report alleged accounting irregularities at the company. As a short-seller, Hindenburg benefits when the stock falls. Then, on Sept. 26, The Wall Street Journal reported that unnamed sources indicated the Department of Justice had launched a probe into Supermicro.
Still, Supermicro stock was having a rocky time before the recent news. It’s down about 60% over the past six months as I write this.
Nvidia has had two declines in the last 10 years that exceeded 50% and investors might be worried that a similar pullback is possible again. But that looks increasingly unlikely. Three reasons explain why.
1. Nvidia holds a more substantial competitive advantage
Ultimately, the most crucial factor driving Nvidia stock is its lead in the AI chip market. Although companies like AMD and Qualcomm have begun to develop competing products, Nvidia is far ahead, and new releases will likely ensure it stays on top.
In contrast, Supermicro is not the only server company — many companies can build servers with Nvidia AI chips. Supermicro has developed a niche by focusing on environmentally friendly and energy-saving servers. Nonetheless, it has to compete against companies such as Dell Technologies and Hewlett Packard Enterprise, giving it no obvious path to industry leadership.
2. Performance backs high multiples
As the market leader, Nvidia has gotten a substantial boost in its valuation. In this case, valuation goes far beyond the price-to-earnings ratio (P/E). It has grown its profits so rapidly that its earnings multiple is 58. That is higher than Supermicro’s 20 P/E, but you could argue Nvidia is cheap considering its triple-digit profit growth.
However, where Nvidia’s premium really stands out in its price-to-sales ratio (P/S). The market values Nvidia at about 32 times its revenue, far above Supermicro’s sales multiple of 1.6.
That P/S ratio could leave Nvidia vulnerable to a massive downturn in its stock price if its growth slows down. Still, Nvidia might be able to avoid such a decline if it can continue to maintain triple-digit or high double-digit net income growth for the foreseeable future.
3. Nvidia stock has more stability
Investors also need to keep in mind the history of both companies and their divergent growth paths. Interestingly, both companies came into being in the same year, 1993. And both spent decades not being seen as mainstream forces in the tech industry.
Supermicro develops IT hardware that it sells in over 100 countries, and despite the extent of its business, it gained little name recognition outside its industry for years.
Nvidia was better known because of its long history of making popular graphics processing units (GPUs). These products were not the most crucial part of a computer and server until a few years ago. However, once data centers made GPUs a more crucial part of the IT infrastructure, the past successes positioned it to emerge as an industry leader.
In contrast, Supermicro did not achieve significant recognition until the pandemic, when demand for its cloud servers increased. When it finally became better known, the growth and recognition fostered a high level of volatility in the stock. And the recent short-seller moves as well as rumors of DOJ interest in the stock have created more volatility. And that could continue, while Nvidia faces no such pressure.
Nvidia is not the next Supermicro
Although anything can happen with Nvidia stock in the near term, investors should probably not have to worry about a drop that compares to the one that Supermicro has faced in 2024.
Unlike Supermicro, Nvidia is a clear technical leader in the AI industry. Moreover, it should maintain a high valuation benefiting from a technical lead and good management. In contrast, Supermicro faces struggles as it gains more name recognition and deals with controversy.
Will Healy has positions in Advanced Micro Devices, Qualcomm, and Super Micro Computer. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, and Qualcomm. The Motley Fool has a disclosure policy.
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