Key Points
A new month brings new challenges and opportunities. The S&P 500 is already up nearly 9% year to date. And investors are left wondering how much steam is left in the generative AI boom after a report from the Massachusetts Institute of Technology (MIT) suggested many corporations are struggling to implement the technology profitably.
Let's discuss why Amazon (NASDAQ: AMZN) and Super Micro Computer (NASDAQ: SMCI) could be great ways to bet on the AI opportunity in September, while potentially minimizing the risk of downside.
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1. Amazon
Amazon is no stranger to unexpected transformations. Investors who bought shares in the early 2000s thought they were betting on an online bookstore. Since then, Amazon has transformed into a general-purpose e-commerce and cloud computing leader, creating trillions in shareholder value in the process. The company's latest pivots to AI and robotics could create even more value through cost-cutting and efficiency.
Amazon has a two-pronged AI strategy. On one side, it "rents out" AI computing power through its cloud computing division, Amazon Web Services (AWS). On the other side, it is incorporating the technology throughout its operations.
According to CEO Andy Jassey, AI will help Amazon "shrink" its corporate workforce by replacing positions with generative tools and agents. For investors, this likely means more value will trickle down to the company's bottom line, even if topline growth is modest or flat. Amazon is also investing in automation across its warehouses with a jaw-dropping 1 million robots used across its global operations, allowing it to slow hiring and replace human labor.
So far, Amazon's cost-cutting efforts are bearing fruit. While second-quarter net sales increased 13% year over year to $167.7 billion, operating profits soared 31% to $19.2 billion. With a forward price-to-earnings (P/E) multiple of just 35, the stock looks reasonably priced compared to its long-term potential for continued bottom-line improvement.
2. Super Micro Computer
It's been three years since ChatGPT sparked the generative AI boom. And that has been plenty of time for leaders like Nvidia to quickly add billions to their market capitalizations by serving the industry's hardware needs. However, no one wants to buy at the top of a mountain. And Super Micro serves as a much cheaper alternative for investors who missed the boat.
With a forward P/E of just 16, Super Micro's shares are remarkably cheaper than Nvidia, which trades for 39 times forward earnings. To be fair, there is a good reason for this disparity. Nvidia designs the chips that Super Micro and others use to create computer servers, giving it a stronger economic moat and better margins. That said, Super Micro still has some perks from an investment standpoint.
Like Nvidia, Super Micro operates on the picks and shovels side of AI, selling the infrastructure other enterprises use to build and offer software solutions to clients. This dynamic means it is somewhat shielded from challenges faced by AI software companies that serve the end user. According to a recent study from MIT, 95% of generative AI pilots fail to deliver meaningful results for companies, suggesting that the software side of the opportunity could be even riskier than the market anticipated.
Super Micro's fourth quarter sales increased 7.5% year over year to $5.8 million, which is modest but acceptable considering its rock-bottom valuation. The stock is ideal for investors who prioritize value over explosive expansion.
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Will Ebiefung has positions in Super Micro Computer. The Motley Fool has positions in and recommends Amazon and Nvidia. The Motley Fool has a disclosure policy.