Finance
Alphabet vs. super microcomputer
The entry of artificial intelligence into the mainstream is a boon for the world cloud computing industry. AI requires enormous amounts of data and computing power to perform tasks, both of which are readily available in a cloud environment.
Two prominent companies that are benefiting from AI and its impact on the cloud computing market are Alphabet (NASDAQ: GOOGL)(NASDAQ: GOOG) And Super microcomputer (NASDAQ:SMCI)commonly known as Supermicro.
Here’s how these two tech companies are reaping the rewards of the AI-powered cloud computing boom, and if you had to choose just one to invest in, it could prove to be the better investment in the long run.
Alphabet’s versatile cloud activities
Alphabet is perhaps best known for its ubiquitous Google search engine. But it also has a thriving cloud computing company called Google Cloud.
This division is experiencing rapid growth. In the first quarter, Google Cloud generated $9.6 billion, which is an increase of 28% from $7.5 billion in 2023. It is now the third largest cloud vendor in the world.
Google Cloud offers several benefits to its business customers. Like all cloud offerings, customers can use it to expand or replace existing IT infrastructure, such as servers.
In addition, Alphabet makes its own AI platform available to customers through Google Cloud, so they can create their own AI systems and apps. Instacart uses this feature to improve customer service workflows.
Additionally, according to CEO Sundar Pichai, “our cloud business is now widely recognized as the leader in cybersecurity.” The AI-powered cybersecurity features are the reason Pfizer acquired Google Cloud.
Super Micro Computer’s focused approach to cloud computing
Supermicro offers computer servers and storage solutions, exactly the components that are crucial for cloud computing. It focuses on high-performance computing products to specifically address the needs of AI-optimized clouds.
Supermicro offers customers a range of options using a modular approach the company calls its ‘Building Block Architecture’. This approach allows the company to quickly adapt products to the technical requirements of its customer base.
The sudden AI-driven demand for Supermicro’s offering led to massive sales growth for the company. In its fiscal third quarter ended March 31, Supermicro posted revenue of $3.9 billion, up 200% year over year.
The company expects the excessive sales to continue. Supermicro forecasts revenue of at least $5.1 billion for its fiscal fourth quarter. That’s more than double the $2.2 billion in fourth-quarter revenue generated in the previous fiscal year.
Supermicro has contributed to its ability to grow sales through an extensive product line. The offering now includes additional IT infrastructure needs, such as power and liquid cooling systems.
Choose between Alphabet and Super Micro Computer
The cloud computing market is expected to grow over several years thanks to AI, from $588 billion last year to $2.3 trillion in 2032. This growth makes both Alphabet and Supermicro attractive long-term investments.
However, deciding which stock is the better buy can be a challenge. In this duel between cloud companies, several factors favor Alphabet.
The Google parent company offers a more diversified business. It has a thriving digital advertising business and is the market leader. Ad sales included $61.7 billion of the company’s $80.5 billion in first-quarter revenue.
Alphabet is also the market leader in online search. Thanks to Google’s popularity, Alphabet has a wealth of data that can feed and strengthen its AI platform.
Supermicro also fights in a competitive space that includes rivals Dell Technologies And Hewlett Packard Enterprise.
Competition has led to price pressure, which has reduced the number of Supermicros gross profit margin to 15.6% in the third quarter, compared to 17.7% in the previous year. Supermicro expects gross margin to decline further in the fourth quarter.
Another factor to consider is rating. Based on the price-earnings ratio (P/E ratio), a commonly used measure to assess the value of a share, Alphabet is the winner. This chart shows that Supermicro’s valuation has soared in 2024.
Although Supermicro’s price/earnings ratio has fallen in recent months, its shares remain more expensive than Alphabet’s.
Furthermore, Supermicro is not cash flow positive. It has spent $2.7 billion building its product inventory over the past three quarters. This resulted in negative free cash flow (FCF) of $1.6 billion in the third quarter.
Alphabet doesn’t have to maintain an inventory of goods to sell, which allowed it to generate a massive $16.8 billion in free cash flow in the first quarter. Over the trailing twelve months, the company’s free cash flow was $69.1 billion.
Thanks to its enormous free cash flow, Alphabet can comfortably afford a dividend. Supermicro does not offer a dividend.
While both companies benefit from rising revenues thanks to growth in the cloud computing sector, given Alphabet’s market-leading products, strong free cash flow, more diversified businesses and better stock valuation, Alphabet is the superior investment right now.
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Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Robert Izquierdo has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet and Pfizer. The Motley Fool recommends Instacart. The Motley Fool has one disclosure policy.
Better Cloud Computing Stocks: Alphabet vs. Super Microcomputer was originally published by The Motley Fool
