Nvidia vs. Supermicro: Evaluating the Future of Data Center Investments

Nvidia (NASDAQ: NVDA) has enjoyed significant success as a stock choice in recent years. However, concerns are emerging about potential challenges ahead. Notably, there’s a rising trend in data center expansions as the deployment of artificial intelligence (AI) is still in its early stages.

At the forefront of this expansion is Super Micro Computer (NASDAQ: SMCI), a company specializing in data center components that house and cool computing devices. While Supermicro plays a vital role in data center infrastructure, the question remains: does it make for a better investment than Nvidia?

Nvidia’s Profit Margins Outshine Competition

Nvidia stands out in the computing market, largely due to its premium graphics processing units (GPUs), which excel in processing multiple calculations simultaneously. These GPUs can also be clustered to enhance performance, making them highly sought after in data centers focused on AI.

GPUs generate significant heat, necessitating effective heat management for optimal performance and longevity. Supermicro provides several cooling solutions, most notably its direct liquid cooling (DLC) method, which uses liquid instead of air to cool devices. This technique allows for reduced airflow requirements, enabling more efficient use of space and yielding an estimated 40% energy savings and 80% space savings—factors that can lower the costs of building expensive data centers.

Despite Nvidia’s clear advantage in product quality, Supermicro faces more competition. Other companies also offer liquid cooling solutions, limiting Supermicro’s pricing power, which is evident in the disparity between the companies’ gross margins.

NVDA Gross Profit Margin data by YCharts

Nvidia possesses the leverage to charge a premium due to its superior product offerings, while Supermicro’s competitive landscape prevents it from doing the same.

Supermicro’s Recent Stock Surge

Recently, Supermicro reported a $20 billion collaboration with DataVolt, a Saudi Arabian data center firm. This announcement led to a rapid stock surge, with shares increasing by roughly 20% following the news and 43% over the past month.

This development is significant; however, the stock’s price has surged, making it more expensive than it was a few weeks prior.

SMCI PE Ratio (Forward) data by YCharts

Currently, Super Micro Computer trades at 22 times forward earnings, aligning its valuation with the S&P 500.

Despite the recent partnership, projections indicate that Supermicro’s growth may not match Nvidia’s pace. Projections for fiscal year 2025, ending June 30, suggest Supermicro’s revenue will grow by 48%, while Nvidia’s revenue is expected to increase by 53% for fiscal year 2026, ending in January 2026. Both growth rates are impressive, but Nvidia retains a slight edge.

While Supermicro’s stock appears more affordable, its declining gross margin raises concerns. Without significant differentiation from its competitors, Supermicro remains vulnerable to disruption from new technologies.

Nvidia has entrenched itself in global data centers, and its technological advantages make it a more favorable stock pick in this comparison.

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Keithen Drury has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.

The views expressed here represent the author’s opinions and do not necessarily reflect those of Nasdaq, Inc.