Investors have been waiting for decades for a new innovation or trend to emerge that can do what the Internet did for American business about three decades ago. After much patience, Artificial Intelligence (AI) The revolution seems to have answered the call.
The appeal of AI is the ability of software and systems to learn without the need for human intervention. This ability to evolve over time and become more proficient at assigned tasks, or even learn new skills, gives the technology an unlimited ceiling in the long term.
In a span of less than 18 months, the euphoria about AI has dissipated Nvidia's (NASDAQ: NVDA) market capitalization of over $3 trillion and required a historic 10-for-1 stock splitBut after such a monstrous surge in Nvidia, some Wall Street analysts have turned their attention to other hyper-growth AI stocks that they believe offer as much as 243% upside.
Headwinds are building for Wall Street's little AI gem
While there will be no shortage of Wall Street analysts who still see upside potential in Wall Street's AI darling, there's no denying that headwinds are starting to build for Nvidia.
Historical precedent is arguably the biggest warning sign. For 30 years, there has not been a major innovation or trend that has avoided an early-stage bubble. This means that investors often overestimate the acceptance and utility of new technologies. The fact that most companies currently lack a clear plan for how they will use AI to increase sales and boost profits is a testament to the fact that artificial intelligence is likely to be the next in a long line of early-stage bubbles.
Beyond history, it is impossible to ignore the external. and Nvidia will have to deal with competitive pressure from within. Despite controlling roughly 98% of the data center graphics processing unit (GPU) market share in 2022 and 2023, Nvidia’s slice of the pie will likely shrink as new AI-powered GPUs enter the market.
Furthermore, its four largest customers by net sales, all members of the Magnificent Seven, are developing AI chips for use in their data centers. Even if Nvidia's AI GPUs maintain their computing advantages, which is entirely likely, these four largest customers will use their in-house chips as complements to Nvidia's hardware. This will reduce future opportunities for Nvidia to gain valuable “real estate” in the data centers of America's most influential companies.
Finally, Nvidia’s adjusted gross margin declined in the fiscal second quarter (ended July 28) for the first time in two years. The shortage of AI GPUs has boosted the company’s pricing power and its rapid gross margin expansion. But as these shortages ease, Nvidia’s pricing power and gross margin should fall.
Rather than focusing on Nvidia, some Wall Street analysts see greater upside potential in the following two high-growth AI stocks.
Snowflake: 93% implied upside potential
The first supercharged AI stock that at least one Wall Street analyst sees outperforming Nvidia is the cloud-based data storage giant Snowflake (NYSE: SNOW)Analyst Kash Rangan of Goldman Sachs believes Snowflake can reach $220 a share, which would represent a gain of about 93%, based on its August closing price.
Rangan added Snowflake to Goldman’s “Conviction List” in July, believing the company is ideally positioned for the next phases of the AI revolution — the stages where AI platforms and applications stand to benefit the most.
Snowflake’s appeal has long been its superior growth rate and well-defined competitive advantages. Its infrastructure layers on top of popular cloud infrastructure service platforms to eliminate data sharing limitations for its customers.
It has also abandoned the traditional subscription model in favor of a pay-as-you-go platform that charges customers based on how much data they store and how many Snowflake compute credits they use. There’s no doubt that this cost transparency is resonating with its customers.
Unfortunately, Snowflake’s once-staggering growth rate has cooled considerably. Year-over-year organic growth rates that were over 70% in the second quarter of fiscal 2023 (ending July 31, 2022) are now below 30%. While the company has an impressive $5.2 billion backlog at its disposal and continues to add bigger fish to its customer pool, the valuation premium it once commanded no longer makes sense.
For Snowflake to get close to Rangan's price target, it will need to significantly improve its adjusted profitability and stabilize its year-over-year sales growth in the 25% range.
Super Micro Computer: Implied Upside Potential of 243%
A second hyper-growth AI stock with tantalizing upside potential, according to one Wall Street analyst's forecast, is the rack server and storage solutions specialist. Supermicrocomputer (NASDAQ: SMCI)Loop Capital's Ananda Baruah believes Super Micro shares will eventually hit $1,500, which would be more than three times their closing value on Aug. 30.
Loop’s target price for Super Micro is based on the company being well positioned in the AI server market. Companies that want to gain a cutting-edge advantage in the AI space will be forced to spend aggressively on the infrastructure needed to do so.
We’ve certainly seen evidence that demand for Super Micro’s servers is incredibly strong. Following net sales growth of 110% in fiscal 2024 (ending June 30), the midpoint of the company’s fiscal 2025 sales guidance ($28 billion) implies revenue growth of 87% in the current year. Despite Wall Street consensus calling for earnings per share of over $45 in fiscal 2026 (ending June 30, 2026), Super Micro is currently valued at a forward price-to-earnings (P/E) ratio of less than 10.
Things seem too good to be true… and they might as well be.
Last week, well-known short-seller Hindenburg Research published a report alleging, among other things, evidence of accounting manipulation at Super Micro Computer. This report by the short-seller was followed days later by Super Micro's delay in filing its annual report. While this is not an admission of wrongdoing nor does it validate Hindenburg's conclusions, it does stir up trouble at a delicate time for the company.
Furthermore, Super Micro Computer has failed to live up to lofty growth expectations in the past. Sales growth forecasts during the initial cloud computing boom in the mid-2010s were not met. Given what history tells us about the next big innovations and how long they take to mature, skepticism about Super Micro seems justified, despite its historically cheap valuation.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group, Nvidia and Snowflake. The Motley Fool has a Disclosure Policy.
Forget Nvidia: Two High-Growth AI Stocks With Upside Potential of Up to 243%, According to Select Wall Street Analysts Originally published by The Motley Fool