Better AI Stock: Super Micro Computer vs. ASML

Super Micro Computer (SMCI 6.09%) and ASML (ASML 1.70%) represent two different ways to invest in the growing artificial intelligence (AI) market. Super Micro Computer, more commonly known as Supermicro, is one of the world’s fastest growing producers of dedicated AI servers. ASML is the world’s largest manufacturer of high-end lithography systems, which are used to produce high-end chips for Nvidia, AMD, and other leading chipmakers.

Over the past 12 months, Supermicro’s stock has rallied more than 480% as ASML’s stock advanced 42%. Let’s see why Supermicro outperformed ASML by such a wide margin — and if it will generate bigger gains for the foreseeable future.

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The differences between Supermicro and ASML

Supermicro builds high-performance servers which can process tasks more efficiently than traditional servers. Through a longtime partnership, Nvidia grants Supermicro access to its top-tier data center GPUs before its larger competitors.

By the end of fiscal 2023 (which ended last June), Supermicro was generating more than half of its revenue from its dedicated AI servers. Many data center operators scrambled to install those servers to address the soaring popularity of generative AI platforms like OpenAI’s ChatGPT.

Supermicro controls a much smaller slice of the server market than Dell Technologies  and Hewlett Packard Enterprise. However, Bank of America expects Supermicro’s share of the dedicated AI server market to rise from 10% to 17% within the next three years as the market expands by 150%.

ASML’s lithography systems are used to optically etch circuit patterns onto silicon wafers. It’s also the only producer of high-end extreme ultraviolet (EUV) systems which are used to produce the world’s smallest, densest, and most power-efficient chips. These systems cost about $200 million each and require multiple planes to ship.

The world’s most advanced chipmakers — TSMC, Samsung, and Intel — all use ASML’s EUV systems to produce their top-tier chips. Therefore, TSMC couldn’t manufacture Nvidia’s latest data center GPUs, AMD’s newest CPUs, and other advanced chips without ASML’s EUV systems.

The indispensable nature of ASML’s lithography systems makes it linchpin of the global semiconductor market, but tighter export curbs are now preventing it from selling its higher-end systems to Chinese chipmakers. Supermicro’s sales of AI servers in China have also been throttled by the ongoing tech war between the U.S. and China.

Which company is growing faster?

Supermicro’s revenue rose 46% in fiscal 2022 and 37% in fiscal 2023 as the market’s insatiable demand for new AI servers outstripped its available supply. Analysts expect its revenue to soar another 110% this year and grow at a compound annual growth rate (CAGR) of 56% from fiscal 2023 to fiscal 2026 as it expands its share of the AI server market.

ASML’s revenue grew 14% in 2022 and 30% in 2023. It also benefited from the expansion of the AI market, but a lot of that growth was offset by the post-pandemic weakness of the smartphone and PC markets. Therefore, ASML is a more diversified play on the broader semiconductor market than a high-growth AI stock.

Analysts expect ASML’s revenue to stay flat this year as it grapples with the export curbs in China, but they expect its revenue to grow at a CAGR of 13% from 2023 to 2026 as it rolls out its next-gen EUV systems for making even smaller chips.

From fiscal 2023 to fiscal 2026, analysts expect Supermicro’s earnings per share (EPS) to grow at a CAGR of 50%. They expect ASML’s EPS to rise at a CAGR of 20% from 2023 to 2026. Based on those estimates, Supermicro trades at 25 times forward earnings while ASML has a much higher forward price-to-earnings ratio of 44.

Supermicro might look more expensive than traditional server makers like Dell and HPE, but it’s also growing faster than both of its larger competitors. It also seems reasonably valued relative to other high-growth AI stocks like Nvidia. ASML is trading at a premium to many other semiconductor equipment makers because it’s monopolized the EUV market, has plenty of pricing power, and remains a top bellwether of the growing semiconductor sector.

The better AI stock: Supermicro

Supermicro and ASML are both solid long-term investments, but Supermicro’s higher growth rates, tighter focus on the AI market, and lower valuations all make it a more compelling investment than ASML right now. ASML’s stock could also gradually head higher, but its near-term gains could be limited until its revenue growth accelerates again.

Bank of America is an advertising partner of The Ascent, a Motley Fool company. Leo Sun has positions in ASML. The Motley Fool has positions in and recommends ASML, Advanced Micro Devices, Bank of America, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel and short May 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.

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