super microcomputerShares soared more than 30% on Nov. 19 after it appointed a new independent auditor and presented a compliance plan to Nasdaq to avoid possible delisting. Those announcements addressed its two pressing issues: the departure of its auditor Ernst & Young in October and a delay in filing its 10-K report, which could result in its shares being delisted.
But even after that rally, Supermicro shares are still 76% below their all-time high from March of this year. The server maker’s stock continues to be weighed down by concerns about its declining gross margins and competition from large server makers such as Dell Technologies and Hewlett Packard Companyand troubling allegations of inflated income from a prolific short seller. Its delayed annual report and Ernst & Young loss seemed to support that bearish thesis, and the Department of Justice (DOJ) is reportedly preparing to investigate Supermicro’s business.
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Supermicro stock looks very cheap at 8 times forward earnings, but will likely trade at that discount until it fully resolves its accounting and regulatory issues. So rather than betting on Supermicro’s turnaround, investors would probably be better off sticking with these two top AI stocks from million-dollar manufacturers: microsoft (NASDAQ:MSFT) and Broadcom(NASDAQ:AVGO).
Microsoft generated a total return of more than 900% over the last decade. That rally, which was primarily driven by the explosive growth of its cloud business, would have turned a $100,000 investment into more than $1 million.
Microsoft became a growth stock again after Satya Nadella, who became its CEO in 2014, pushed the company to transform its desktop software into cloud-based mobile apps and services. It also built Azure into the world’s second-largest cloud infrastructure platform and expanded its hardware and gaming businesses.
Over the past five years, Microsoft has increased its investments in OpenAI, the maker of ChatGPT, and integrated the startup’s generative AI tools into its own search and cloud services. With that foresight, it tied more businesses and consumers into its cloud ecosystem, and gained first-mover advantage against AlphabetGoogle and other tech giants in the nascent generative AI market.
In fiscal 2024 (which ended in June), Microsoft’s AI-driven transformation increased its total cloud revenue by 23% to $135 billion, which accounted for 55% of its top line revenue. From fiscal 2024 to fiscal 2027, analysts expect its revenue and earnings per share (EPS) to grow at a compound annual growth rate (CAGR) of 14% and 15%, respectively. Its shares still look reasonably valued at 28 times next year’s earnings, and will likely remain one of the top bets in the AI market for years to come.
Broadcom, known as Avago before taking over the original Broadcom in 2016, has generated a total return of 2,300% over the last 10 years. That rally would have turned a $50,000 investment into $1.2 million.
Broadcom’s semiconductor business sells a wide range of chips for the mobile, wireless, networking, data storage and industrial markets. But in recent years, it has built a huge infrastructure software business by acquiring CA Technologies, Symantec’s enterprise security division, and cloud software giant VMware.
Broadcom’s software and chip manufacturing businesses are growing. But over the past two years, its sales of networking and optical chips for the AI-oriented data center market have skyrocketed as more companies upgraded their infrastructure. For fiscal 2024 (which ended in October), it expects its sales of AI-oriented chips to roughly triple to $12 billion, or nearly a quarter of its projected full-year sales. That rapid growth should offset its slower sales of non-AI infrastructure chips and software, which are more sensitive to macroeconomic headwinds.
From fiscal 2024 to fiscal 2026, analysts expect Broadcom’s revenue to grow at a CAGR of 15% as its EPS grows at a CAGR of 124%. That profit growth should be driven by strong sales of AI chips and the expansion of its higher-margin software business. Its stock may look a little expensive at 42 times forward earnings, but its track record of smart acquisitions, high exposure to the AI market, and solid growth could justify that higher valuation.
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Alphabet executive Suzanne Frey is a member of The Motley Fool’s board of directors. Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Alphabet and Microsoft. The Motley Fool recommends Broadcom and Nasdaq and recommends the following picks: long $395 January 2026 calls on Microsoft and short $405 January 2026 calls on Microsoft. The Motley Fool has a disclosure policy.
Should you forget about the supermicrocomputer and buy these 2 AI stocks from millionaire creators? was originally published by The Motley Fool
