Alphabet or Super Micro Computer: Goldman Sachs Picks the Superior AI Stock to Buy

The last two years have brought enormous change; it is fair to say that we no longer live in the same world we lived in back in 2022. The changes are various, but for the combination of economy and digital technology, they have taken the form of generative AI. While AI tech, in various forms, has been with us since almost the beginning of the computer age, generative AI is something new. Capable of mimicking human responses to human prompts, generative AI has already forever altered the digital landscape.

In a recent report from Goldman Sachs, the firm’s chief economist Jan Hatzius lays out the ways that AI has impacted the economic outlook, writing: “Earlier this year, we estimated that the efficiency gains promised by generative artificial intelligence (AI) could provide a significant boost to global labor productivity. While considerable uncertainty remains about the timing and magnitude of AI’s effects, our baseline expectation is that generative AI will affect productivity within our ten-year forecast horizon. We are therefore upgrading our global GDP forecasts from 2027 onwards to incorporate the impact of generative AI.”

As investors seek to capitalize on this transformative wave, the spotlight falls on stocks driving the generative AI revolution. While Alphabet (NASDAQ:GOOGL) and Super Micro Computer (NASDAQ:SMCI) emerge as frontrunners, Goldman Sachs analysts have not shied away from selecting the superior AI stock to buy. While both companies have their boosters, Goldman definitely has a preference, so let’s take a closer look at both.

Alphabet

The first stock we’ll look at is Alphabet, the parent company of Google – and one of the most prominent names in the tech world. Beyond its flagship ventures, Alphabet’s diverse portfolio encompasses ventures deeply integrated with AI. Among these are Waymo, pioneering autonomous vehicles; Wing, specializing in drone-based air freight; DeepMind, dedicated to advancing AI research; and, of course, Bard, an innovative generative AI chatbot. Together, these add up to a solid exposure to AI, one that has paid out well for Alphabet.

The fruits of Alphabet’s strategic investments are undeniable. Alphabet is one of the ‘Magnificent 7,’ the largest tech firms, and the companies that have led the market’s gains for the past several years. With its $1.66 trillion market cap, Alphabet is one of the handful of trillion-dollar-plus companies on Wall Street – and the fifth-largest in the world.

Alphabet has reached that height on the backs of solid performance, mainly from Google, its largest revenue generator. Overall, the company brought in $86.3 billion in fiscal 4Q23, a result that was up 13% year-over-year, a larger growth margin than the 12% that had been expected. In dollar terms, the Q4 earnings beat the forecast by more than $1 billion. At the bottom line, Alphabet showed a diluted EPS of $1.64, significantly higher than the $1.05 reported in the prior year’s fourth quarter, and 5 cents per share better than had been anticipated.

For Goldman Sachs’ Eric Sheridan, a 5-star analyst rated in the top 5% of the Street’s stock pros, the main point here is Alphabet’s use of AI, and it capacity to further leverage the technology down the road.

“Looking long term, we continue to have a view that Alphabet management is striking a positive tone on balancing investments against the long-term growth potential of AI, proceeding in a responsible manner in deploying AI tools across consumer/enterprise computing and managing a multi-year transition to more AI infused layers into its existing core products. While questions will remain about AI’s impact on core products (e.g., if such a shift can be disruptive over the short-term) or cost structure (e.g., if computing costs per search will rise), we see Alphabet as the leader in compounded AI investment in the past 5-6 years and well positioned to capitalize on this trend in the coming decade,” Sheridan opined.

For the bottom line on his recommendation, Sheridan adds, “In summary, we reiterate our positive outlook on GOOGL and see Alphabet as well positioned to capitalize on rising utility across several computing platforms including consumer desktop, consumer mobile & enterprise cloud computing.”

That’s the background to a Buy rating, of course, and Sheridan complements it with a $171 price target that suggests an upside potential of 28% on the one-year horizon. (To watch Sheridan’s track record, click here)

Like many large- and mega-cap tech stocks, Alphabet has no lack of Wall Street analyst reviews – the shares have 37 recommendations on record, including 29 Buys and 8 Holds, for a Strong Buy consensus rating. The stock is selling for $133.35, and its $164.59 average target price implies a 12-month gain of 23%. (See GOOGL stock forecast)

Super Micro Computer (SMCI)

The next stock we’ll look at is Super Micro Computer, a tech firm working out of Silicon Valley. The company provides solutions for server and storage needs, applicable to multiple computation-intensive work systems. Super Micro’s product lines are designed to fully meet the needs of the end-users, and connect scalable installations with high-performance computing. The company is capable of building out complex server systems in-house, from initial design to manufacturing to delivery and installation. Customers can choose from custom-made or off-the-shelf servers and storage systems, and can select a wide range of subsystems and accessories, even in unique configurations.

Which is all to say that Super Micro gives its customers an unmatched variety of choices in a dynamic computer market. The company’s product lines have application in Edge/5G systems, in data centers, in public and private clouds, and in AI – where they bring the high-end computing capacity needed for the new generative AI tech. This is big business, and Super Micro leveraged it for $7.2 billion in total revenues during its last fiscal year, 2023.

Turning to the company’s financial results, we see that Super Mirco’s fiscal 2Q24 – the quarter ending on December 31 – had total sales of $3.66 billion. This was up from $2.12 billion in fiscal Q1 and up  from the $1.8 billion reported in fiscal 2Q23; the 2Q24 revenues also beat the forecast by $400 million. The company derived solid earnings from the revenue, totaling $5.59 per share in non-GAAP measures. This EPS figure was 43 cents per share over the pre-release estimates.

Despite all of Super Micro’s advantages – its strong product line, its exposure to AI through the data center segment, and its financial results – the stock still gets a Hold (i.e. Neutral) rating from Goldman Sachs.

Explaining this, analyst Mike Ng writes: “SMCI is a supplier of server and storage systems (92% of revenue in F2023), and other IT solutions that should benefit from growing demand for AI data center infrastructure with a competitive advantage in its demonstrated AI supplier partnerships (e.g., Nvidia) and design innovations (e.g., modular system optimization, global presence). That said, we view the stock as fairly valued at 32X NTM P/E, which is in line with other IT hardware and semiconductor stocks that can be viewed as AI enablers (e.g., ANET, NVDA, AMD). The stock is up more than 1,000% (11X) since the beginning of 2023 driven by a 3X growth in earnings (NTM EPS) and a nearly 3.5X expansion in valuation (NTM P/E) to 32X (v. 9x).”

In addition to his Hold rating, Ng puts a $941 price target on SMCI shares, indicating that he sees ~12% downside to the stock in the coming year. (To watch Ng’s track record, click here)

Overall, the stock has 9 recent analyst reviews, and these include 5 Buys, 3 Holds and a single Sell. The consensus rating is a Moderate Buy, and the average price target, at $824.11, implies the stock will see a downside of 23% this coming year. (See SMCI stock forecast)

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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.