Will Nvidia stock drop as much as Supermicro? 3 points to consider.

Nvidia (NASDAQ: NVDA) The stock has retreated since the summer as it struggled to meet rising investor expectations. However, his downfall did not compare to that of one of his key partners, Super Micro Computer (NASDAQ: SMCI)which faced a series of events that shake confidence.

Supermicro delayed filing its latest 10-K on Aug. 28, a day after short seller Hindenburg Research released a report about alleged accounting irregularities at the company. As a short seller, Hindenburg benefits when inventory runs low. Then on September 26, The Wall Street Journal reported that anonymous sources indicated that the Justice Department had launched an investigation into Supermicro.

However, Supermicro shares had a rough time ahead of the recent news. It’s down about 60% in the last six months as I write this.

Nvidia has had two declines in the last 10 years that exceeded 50%, and investors may be concerned that a similar pullback is possible again. But that seems increasingly unlikely. Three reasons explain why.

1. Nvidia has a more substantial competitive advantage

Ultimately, the most crucial factor driving Nvidia’s stock is its leadership in the AI ​​chip market. Although companies like it AMD and Qualcomm have started developing competing products, Nvidia is way ahead, and new releases will likely ensure it stays on top.

In contrast, Supermicro isn’t the only server company — many companies can build servers with Nvidia AI chips. Supermicro has carved out a niche for itself by focusing on green and energy-saving servers. However, it has to compete with companies like Dell Technologies and Hewlett Packard Enterprisegiving him no obvious path to industry leadership.

2. Performance supports high multiples

As the market leader, Nvidia received a substantial boost in its valuation. In this case, the valuation far exceeds the price-to-earnings (P/E) ratio. It has grown its profits so fast that its earnings multiple is 58. That’s higher than Supermicro’s 20 P/E, but you could argue that Nvidia is cheap given its triple-digit profit growth.

However, where Nvidia’s premium really stands out is its price-to-sales (P/S) ratio. The market values ​​Nvidia at about 32 times its earnings, well above Supermicro’s sales multiple of 1.6.

That P/S ratio could leave Nvidia vulnerable to a massive drop in its stock price if its growth slows. However, Nvidia could avoid such a decline if it continues to maintain triple-digit or double-digit net income growth in the near future.

3. Nvidia stock has more stability

Investors should also consider the history of both companies and their divergent growth paths. Interestingly, both companies came into being in the same year, 1993. And both spent decades not being seen as major forces in the tech industry.

The story continues

Supermicro develops IT hardware that it sells in more than 100 countries and, despite the size of its business, has gained little name recognition outside its industry for years.

Nvidia was better known for its long history of producing popular graphics processing units (GPUs). These products were not the most important part of a computer and server until a few years ago. However, once data centers make GPUs a more important part of IT infrastructure, past successes have positioned it to become an industry leader.

In contrast, Supermicro didn’t gain significant recognition until the pandemic, when demand for its cloud servers increased. When it finally became more widely known, the growth and recognition fostered a high level of stock volatility. And recent moves by short sellers as well as rumors of DOJ interest in the stock have created more volatility. And that could continue, while Nvidia faces no such pressure.

Nvidia is not the next Supermicro

While anything can happen to Nvidia stock in the short term, investors probably shouldn’t worry about a decline comparable to the one Supermicro faced in 2024.

Unlike Supermicro, Nvidia is a clear technical leader in the AI ​​industry. Moreover, it should maintain a high valuation, benefiting from technical leadership and good management. Instead, Supermicro faces struggles as it gains more name recognition and faces controversy.

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Will Healy has positions in Advanced Micro Devices, Qualcomm and Super Micro Computer. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia and Qualcomm. The Motley Fool has a disclosure policy.

Will Nvidia stock drop as much as Supermicro? 3 points to consider. was originally published by The Motley Fool