Supermicro Computer (NASDAQ: SMCI) is an excellent way to play the artificial intelligence revolution. Rather than betting on the companies creating AI models and products, SMCI is like selling picks and shovels in a gold rush.

Supermicro sells servers and storage systems for data centers and large enterprises. While companies like Nvidia and SK Hynix produce individual components like GPUs and RAM, Supermicro packages these into server racks for sale to large enterprises.

Because corporate AI budgets have multiplied several times in recent months, firms like Supermicro, which sells the servers on which AI work is done, will see massive benefits.

Supermicro: A Quick Rundown

Supermicro Computercsells complete IT server solutions. That means large racks full of servers customized to customer needs and a slew of services layered on top of the servers.

The company offers solutions to multiple different market verticals, but its GPU-powered AI server solutions accounted for 29% of revenue in its most recent earnings report, compared to 20% in the previous quarter. CFO David Weigand said that the company's "next-generation AI platforms are driving record levels of design wins along with strong orders from top-tier customers and a record backlog."

While Supermicro’s most recent headline earnings results were nothing to get overly excited about, the market pounced on its strong guidance for Q4 2023, forecasting earnings per share between $2.21 and $2.71, compared to Wall Street’s expectation of a mere $1.76 per share.

Supermicro  stock skyrocketed following the report last month, and the stock has been one of the best-performing mid-to-large cap technology stocks in the stock market recently:

The Bull Case for Supermicro

Despite Supermicro stock being one of the best-performing technology stocks this year and a massive AI beneficiary, it might be a surprise that the company still trades at a fair valuation.

Sitting at a PE ratio of 24, Supermicro is cheaper than the S&P 500’s multiple of 25, leaving plenty of room for upside. This is especially true when compared to the valuations of Wall Street’s other AI favorites like Nvidia (NASDAQ: NVDA), which trades at a 200x PE ratio.

Furthermore, while many other firms in the semiconductor industry are seeing inventories pile up, Supermicro’s problem is its inability to fulfill demand due to supply chain shortages.

Furthermore, the company’s modular server design philosophy allows customers to choose the components in their servers, allowing Supermicro to rapidly offer the most cutting-edge chips that hit the market without being constrained by pre-configured product lines.

The Bear Case for Supermicro

While Supermicro's valuation is modest compared to other AI plays like Nvidia , it's not an apples-to-apples comparison. Supermicro doesn't design proprietary chips and instead buys components and assembles them into servers. The barrier to entry into this business is far lower than the immense engineering advantages that a company like Nvidia has.

Server companies tend to trade at relatively low valuations as the stiff competition compresses margins across the industry. Supermicro competes with many well-capitalized firms like Dell, HP, and Lenovo in the server market.

While Supermicro’s modular architecture and focus on getting the newest chips to market first gives it a leg up, its significant outperformance compared to peers needs to be called into question, as competitors Dell and HP are up only 20% and 2% year-to-date, respectively. And given the stratospheric rise in Supermicro’s stock, even some bulls are waiting on the sidelines for a more favorable entry point.

There's also the question of the semiconductor industry. While the enterprise AI market is doubtlessly growing fast, other product segments continue to lag expectations across the industry. Taiwan Semiconductor (NYSE: TSM), the world's largest and most advanced foundry, continues to see customer inventories pile up and issued disappointing guidance in April.

For companies like Supermicro, which isn’t a pure play on AI, the lack of growth in other industry segments can cast a shadow over gains in AI.