Nvidia has several advantages over its troubled partner.
Nvidia (NVDA -2.13%) Stock prices have fallen since the summer as the company has struggled to meet rising investor expectations. However, the decline was less than that of one of its major partners, the supermicrocomputer. (SMCI 4.31%)is facing a series of trust-shaking events.
Supermicro delayed filing its latest 10-K on August 28, a day after short seller Hindenburg Research released a report alleging accounting fraud at the company. As a short seller, Mr. Hindenburg profits when stock prices fall. And on September 26, the Wall Street Journal reported that anonymous sources indicated that the Justice Department had opened an investigation into Supermicro.
Still, until the recent news, supermicro stocks had been through a volatile period. As of this writing, it is down about 60% over the past six months.
Nvidia has fallen more than 50% twice in the past decade, and investors may be concerned about the possibility of another similar decline. But that seems increasingly unlikely. Here are three reasons why.
1. Nvidia has a bigger competitive advantage
At the end of the day, the most important factor driving Nvidia stock higher is its lead in the AI chip market. While companies like AMD and Qualcomm have started developing competing products, Nvidia is far ahead and its new releases will ensure it stays on top.
In contrast, Supermicro isn’t the only server company. Many companies can build servers with Nvidia AI chips. Supermicro has developed a niche market by focusing on green and energy-efficient servers. Nevertheless, the path to industry leadership is not clear, as it must compete with companies such as Dell Technologies and Hewlett Packard Enterprise.
2. Performance that supports high multiples
As a market leader, Nvidia’s valuation has increased significantly. In this case, the valuation far exceeds the price-to-earnings ratio (P/E). The company’s earnings are growing very quickly, and its earnings multiple is 58x. That’s higher than Supermicro’s 20 P/E ratio, but considering triple-digit earnings growth, Nvidia is cheap.
However, where Nvidia’s premium really stands out is in its price-to-sales (P/S) ratio. The market values NVIDIA’s sales at approximately 32 times sales, which is far higher than Super Micro’s sales multiple of 1.6 times.
This P/S ratio could leave NVIDIA vulnerable to a significant drop in stock price if growth slows. Still, if NVIDIA can maintain triple-digit or high-double-digit net income growth for the time being, it may be able to avoid such a decline.
3. Nvidia stock price is more stable
Investors should also keep in mind the history and different growth paths of both companies. Interestingly, both companies were founded in the same year, 1993. And neither company was considered a mainstream force in the tech industry for decades.
Supermicro develops and sells IT hardware in more than 100 countries, but for many years it had little visibility outside the industry, despite its size.
Nvidia is well known for its long history of manufacturing popular graphics processing units (GPUs). These products were not the most important part of computers and servers until a few years ago. However, as data centers make GPUs a more important part of IT infrastructure, past success has led them to emerge as industry leaders.
In contrast, Supermicro didn’t gain much recognition until the pandemic, when demand for cloud servers increased. When it finally became well-known, growth and recognition increased stock price volatility. And recent short-seller activity and rumors that the Justice Department is interested in the stock have added to the volatility. And unless NVIDIA is under such pressure, this situation is likely to continue.
Nvidia is not the next Supermicro
Anything can happen to Nvidia stock in the short term, but investors probably don’t need to worry about a decline like the one Supermicro faced in 2024.
Unlike Supermicro, Nvidia is clearly the technological leader in the AI industry. Additionally, they need to benefit from technological leadership and good management teams to maintain a strong reputation. In contrast, Supermicro has faced an uphill battle as it raises its profile and deals with controversy.
Will Healy works at 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.
