As companies, Super Micro Computer (SMCI -0.86%) and Dell Technologies (DELL 0.48%) were both once considered slow-growth sellers of traditional servers. But over the past few years, their exposure to the booming AI market has lifted their financial performances and that has lifted their stocks.
Over the past three years, shares of Super Micro Computer, more commonly known as Supermicro, surged 1,230% as it sold a higher mix of dedicated AI servers. Dell’s stock rallied more than 140% as it also launched more AI servers.
Image source: Getty Images.
Supermicro is growing a lot faster than Dell, but its stock was cut in half over the past three months as it grappled with declining gross margins, troubling allegations from a short seller, and rumors of a brewing Department of Justice (DOJ) investigation. Shares of Dell, which didn’t face any of those problems, only dipped 8%.
Will Dell continue to outperform Supermicro as the better AI play for the foreseeable future?
Supermicro still has a lot to prove
Supermicro only controlled 6% of the global server market at the beginning of 2024, according to CSI Market, while Dell led the market with a 58% share. However, Supermicro carved out its own niche by selling high-performance, liquid-cooled servers for demanding computing tasks. That made it an ideal partner for Nvidia, which supplied Supermicro with high-end data center GPUs to help it produce dedicated AI servers.
Supermicro’s partnership with Nvidia wasn’t exclusive, but it established a first-mover advantage by launching its first AI servers before Dell and its other industry peers. Those launches coincided with the rapid growth of the generative AI market, and Supermicro’s revenue more than quadrupled from $3.6 billion in fiscal 2021 (which ended in June 2021) to $14.9 billion in fiscal 2024. Its earnings per share (EPS) also grew nearly tenfold. AI servers now account for over half of its revenue.
But Supermicro’s growth spurt drove Dell, Hewlett-Packard Enterprise, and other big server makers to ramp up their production of their own Nvidia-powered AI servers. Mizuho Securities analyst Vijay Rakesh recently predicted that pressure would reduce Supermicro’s share of the nascent AI server market from roughly 80%-100% in 2022-2023 to about 40%-50% in 2024. That’s probably why its gross margin shrank both sequentially and year over year in its latest quarter.
As Supermicro grappled with those challenges, the prolific short-seller Hindenburg Research published a report on Aug. 27 that alleged the company had “significant accounting, governance, and compliance issues.” Those accusations reportedly triggered a new DOJ probe, but the government agency has neither confirmed nor denied those reports. Supermicro’s management says the Hindenburg report “contains false or inaccurate statements about our company including misleading presentations of information that we have previously shared publicly.” Very little additional information has emerged since the report’s release and Supermicro’s initial response.
For now, analysts expect Supermicro’s revenue and EPS to soar 87% and 47%, respectively, in fiscal 2025. Those are incredible growth rates for a stock that trades at 16 times forward earnings, but its valuations could remain compressed until it silences the bears and overcomes all of its near-term challenges.
Dell is still generating slow but steady growth
Dell sells a wide range of PCs, PC peripherals, servers, and data storage products. It generated 12% of its revenue from dedicated AI servers in its latest quarter, but a lot of that growth was offset by the PC market’s slowdown over the past two years. Its sales of storage products have also slowed down as the macro headwinds drove many of its enterprise customers to rein in their spending.
In fiscal 2024 (which ended in February 2024), Dell’s revenue and adjusted EPS declined 14% and 6%, respectively, as it grappled with those challenges. But looking ahead, it expects to “return to growth” in fiscal 2025 as the PC market warms up, it ramps up its production of dedicated AI servers, and data centers finally upgrade their storage devices again. Analysts expect its revenue and adjusted EPS to both rise about 10% for the year.
Over the long term, Dell expects to grow its annual revenue by 3%-4%, its adjusted EPS by at least 8%, and to return more than 80% of its adjusted free cash flow (FCF) to its investors through buybacks and dividends. Its stock looks cheap at just 13 times forward earnings, it pays a decent forward dividend yield of 1.4%, and it bought back about 8% of its shares over the past three years.
Those strengths make Dell a more stable investment than Supermicro, and it doesn’t face any near-term pressure from short sellers and regulators. Its shipments of AI servers have also been rising sequentially over the past year — which indicates it’s gradually chipping away at Supermicro’s dominance of the AI server market.
The better buy: Supermicro
Dell is still a well-rounded play on the PC and data center markets, but it simply isn’t as attractively valued as Supermicro. Supermicro’s stock could stay in the penalty box until it resolves its near-term issues, but it could still be a great long-term play on the nascent AI server market.
Dell, HPE, and others will likely gain ground against Supermicro, but there could be plenty of room for all of these companies to flourish without trampling each other. So if you’re willing to take a bigger risk for a higher return over the next few years, Supermicro is the better buy. Dell is a safer play, but it could generate lower returns.
