C3.ai (NYSE: AI) and Super Micro Computer (NASDAQ: SMCI) both appear poised to benefit from the expanding artificial intelligence (AI) market. C3.ai develops AI algorithms that can plug into an organization's existing software infrastructure to speed up and automate specific tasks. Super Micro Computer (commonly known as Supermicro) is a leading manufacturer of purpose-built AI servers and server architecture.
However, investors are much more bullish on Supermicro, which has risen over 2,000% over the past three years. C3.ai's stock price has fallen over 50% in the same period and is still trading nearly 30% below its IPO price. Let's see if Supermicro will remain a better AI tech company than C3.ai in the near future.
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Why has C3.ai failed to impress investors?
C3.ai primarily serves large government, industrial and energy customers. The company derives more than 30% of its annual revenue from a joint venture with energy giant Baker Hughes, but the contract expires in April 2025. To continue growing in the coming years, the company needs to renew the contract on favorable terms.
C3.ai's revenue grew 38% in fiscal year 2022 (ending April 2022), but only 6% in fiscal year 2023. Growth slowed as the company faced tough competition and macroeconomic headwinds that forced many companies to rein in their software spending. To address that pressure, C3.ai rolled out more consumption-based plans, which generate more stable revenue than subscriptions. This shift suppressed revenue through fiscal year 2023, but revenue growth accelerated again through fiscal year 2024, up 16% for the full year. As consumption-based services expanded, rising customer engagement rates repeatedly offset declines in the average selling price of services.
The company expects revenue to grow 19% to 27% in fiscal year 2025 as it gains more federal customers and rolls out new tools for the generative AI market. While this accelerated growth is promising, the stock isn't cheap, trading at nearly 10 times this year's revenue. The company is also unprofitable on both a generally accepted accounting principles (GAAP) and non-GAAP basis, and is prioritizing the development of new generative AI tools over significantly narrowing its net loss.
So, C3.ai's customer concentration issues, lack of profits, and high valuation have likely kept bulls at bay as other AI stocks have soared over the past year. High interest rates also shine an unfavorable light on C3.ai's biggest weakness.
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Why are bulls not bored with Supermicro?
Supermicro has a smaller share of the server market than Dell Technologies and Hewlett Packard Enterprise, but it primarily makes high-performance liquid-cooled servers that can handle complex tasks more efficiently than traditional servers.
That focus made the company an ideal partner for Nvidia, which gave Supermicro access to its top-tier data center GPUs before many of its larger competitors, after which Supermicro carved out a niche for itself by selling purpose-built AI servers.
Supermicro's revenue and profits grew 37% and 115%, respectively, in fiscal 2023 (ended last June) as the market's insatiable demand for new AI servers quickly outpaced supply. As the AI ​​market continues to expand, analysts expect the company's revenue and profits to soar 110% and 102%, respectively, in fiscal 2024.
Supermicro currently derives more than half of its revenue from AI servers, and that percentage is expected to continue to rise: Bank of America expects Supermicro's share of the dedicated AI server market to grow from 10% to 17% within the next three years as the overall market grows by 150%.
In other words, Supermicro may still have plenty of room to grow as its business matures. But investors should keep in mind that Dell, HPE, and others are also rolling out new AI-specialized servers to catch up with Supermicro, and it will likely face pricing pressure and tough year-over-year comparisons in the coming years. For now, though, Supermicro's stock looks surprisingly cheap relative to its growth potential, trading at 22 times projected earnings and double this year's sales.
Better Buy: Supermicro
It's easy to see why bulls prefer Supermicro over C3.ai: Supermicro is growing faster, has fewer competitors, has no customer concentration issues, and has a cheaper stock price. It also represents a more direct way to benefit from the growth of the AI ​​market. These core strengths make Supermicro a better buy than C3.ai going forward.
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Bank of America is an advertising partner of The Ascent, a Motley Fool. Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares in and recommends Bank of America and NVIDIA. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.
The post Better AI Tech Stocks: C3.ai vs. Super Micro Computer was originally published by The Motley Fool.
