This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Key Points
- The artificial intelligence (AI) trend has been the driving force behind many top stocks' performance over the past five years.
- In September 2020, Nvidia already had a market cap of more than $340 billion and was trading at high valuations.
- Super Micro Computer was worth less than $2 billion at that time, but has outperformed the chipmaker in the years since.
It's hard to imagine that any stock may have performed better than Nvidia (NASDAQ: NVDA) over the past five years. The company has been a huge winner due to the artificial intelligence (AI) trend, as its chips provide the majority of the processing power used to develop, train, and operate AI models.
Today, Nvidia is the most valuable company in the world, with a market cap of around $4.3 trillion. It has come a long way, but what may surprise you is that since September 2020, it has only been the second-best performing stock on the S&P 500. The award for first place goes to Super Micro Computer (NASDAQ: SMCI), also known as Supermicro. (This is based on five-year returns as of Sept. 1, and does not include stocks that weren't public five years earlier.)
Supermicro's stock has rallied by more than 1,400% in five years
As of Sept. 1, shares of Supermicro were up by more than 1,400% over the prior five years. Those gains beat the nearly 1,200% return that Nvidia generated during the same stretch by a considerable margin. In terms of dollars, a $10,000 investment in Supermicro would have grown to be worth more than $153,000 today, while a similar investment in Nvidia would be worth $126,000.
Either way, you'd still be up big, but your gains would have been far higher with Supermicro. It's also noteworthy that those are its gains after a particularly drastic drop. In the early part of 2024, the tech company had a falling out with its auditor, and there were questions about the reliability of its financial reports. The stock plunged, and it's still down by around 60% from its peak. So if not for those headwinds, the gap between Nvidia and Supermicro's returns could be far greater.
Why a better return doesn't mean one business is better than another
There are countless examples in the stock market of companies with valuations that don't seem to make sense. Hype and excitement can send a company's shares soaring to unjustifiable levels. And an important factor to consider is market cap. Even five years ago, Nvidia was a well-established megacap business with a market cap of more than $340 billion. Supermicro, at that time, was still a small cap, with a market cap of just $1.4 billion. But its performance lifted it rapidly out of that realm. It was added to the mid-cap S&P 400 index in December 2022 and was promoted again to the large-cap S&P 500 in March 2024. Now, it's worth about $27 billion.
It's a lot easier for a small-cap stock to have a huge rally than a large-cap or a megacap stock. Supermicro was still a relatively unknown company back in 2020, but the AI-driven surge in demand for its servers and related tech products transformed its business and put it on the map. The AI trend helped Nvidia enormously as well, but because it was already so large and trading at a loftier price-to-earnings ratio, its growth was a bit more constrained, relatively speaking.
That being said, Nvidia has achieved some fantastic returns, both in the medium term and the long term. And at a price-to-earnings (P/E) multiple of 50, it's still trading at a hefty premium, while Supermicro may look more reasonably priced at a P/E ratio of 27.
Nvidia is still the safer growth stock to own, by a mile
Supermicro may have generated stronger returns than Nvidia over the past five years, but that doesn't mean that pattern will continue. Supermicro's valuation is much higher today than it was five years ago, but its shares have risen by just 5% over the past 12 months. Investors appear to be taking a more cautious view of the stock, which is justifiable given Supermicro's low margins and limited profitability.
Nvidia has a more robust business, and over the past 12 months, its free cash flow has totaled an incredible $72 billion (compared to $1.5 billion for Supermicro). Given that Nvidia remains the clear leader in the AI chip space and still has tremendously strong financials, it looks like a far better and safer growth stock to own from here than Supermicro.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
