Potential Advantage for Another Artificial Intelligence (AI) Firm due to Alleged Setback by Nvidia towards Supermicro

Potential Advantage for Another Artificial Intelligence (AI) Firm due to Alleged Setback by Nvidia towards Supermicro

Breakups can be unpleasant. And in the situation of Super Micro Computer (SMCI decreasing by 1.12%), there's a clear reason why its long-term partner Nvidia seems to be distancing itself.

In late August, Supermicro became a focus of attention following a damaging report by Hindenburg Research. Subsequently, Supermicro postponed its 10-K filing, and The Wall Street Journal reported that the Department of Justice had initiated an investigation into the company. Matters worsened when Ernst & Young resigned as Supermicro's financial auditor due to concerns over the company's financial reporting. At the time, Supermicro was expected to be a significant supplier of newly launched storage clusters and server rack designs using Nvidia's upcoming Blackwell GPU.

Apparently, Nvidia has had enough. As reported by Digitimes, Nvidia is shifting Blackwell orders away from Supermicro to guard against potential supply chain disruptions.

In this scenario, Dell Technologies (DELL increasing by 3.40%) could potentially benefit from the Supermicro turbulence. Here's why the stock presents a compelling investment opportunity.

Why Dell could emerge as the beneficiary

Nvidia has a significant stake in the Blackwell launch, and any issues at this stage of the game are unacceptable. But why could Dell be of assistance in this situation?

Dell is renowned for its consumer and enterprise computing devices, but it also has a considerable infrastructure solutions business, which is a fancy way of saying Dell offers networking services and products for data centers. Similar to Supermicro, Dell's storage solutions and server designs are a vital component of the broader artificial intelligence (AI) industry. The reason is that data centers house chipsets like Nvidia's GPUs, which play a significant role in developing generative AI applications.

Perhaps the main reason Dell could gain from the Blackwell launch is due to some hints management dropped during the company's last earnings call. In August, Chief Operating Officer Jeffrey Clarke revealed that the company had been supplying its "most advanced architecture aligned to Blackwell to numerous customers" for some time.

He went on to say that Dell's IT infrastructure backlog encompasses a wide range of architectures, but "[t]he vast majority" is related to Nvidia's H100s, H200s, and Blackwell, as well as a couple of other opportunities involving AMD and Intel.

Although I don't want to jump to conclusions, I think those statements imply that Dell is already collaborating closely with Nvidia. Moreover, Blackwell appears to be a growth catalyst for Dell. Another perspective on the Nvidia situation is that if businesses purchasing Blackwell GPUs can't also ensure access to the chipset architecture services they require, demand for the new chips might stall.

Nvidia needs its IT infrastructure partners to be on the ball as the Blackwell launch approaches, and with Supermicro's problems showing no signs of abating, it's essential that Nvidia identify other vendors to assist – and quickly.

Is Dell stock a worthwhile investment?

In the chart below, you can see Dell compared to a group of IT infrastructure providers based on their forward price-to-earnings (P/E) ratios.

Given all the controversy surrounding Supermicro, it's not surprising to see its valuation multiple contract dramatically. On the other hand, Dell's forward P/E of 17.1 has remained relatively consistent for some time. Not only is Dell trading at a substantial discount to Arista Networks, but the S&P 500's average forward P/E of 22.1 is also significantly higher.

From my perspective, the market is underestimating Dell considerably right now. The company already has Blackwell-driven tailwinds bolstering its near-term growth. Moreover, with Nvidia apparently shifting orders away from Supermicro and looking to other vendors, I'm surprised to see Dell's valuation barely move on this news.

The final word

While I can't claim to know for certain whether Nvidia has turned to Dell during the Supermicro chaos, the Blackwell launch seems significant for those involved. Moreover, with Dell having shared with investors that a significant portion of its backlog is tied to Nvidia in some way, it's challenging to see how an investment in Dell will yield lower returns than the overall market by this time next year.

There's currently an excellent opportunity to purchase Dell stock, regardless of whether or not the company benefits from changes to Supermicro's order flow.

In light of Supermicro's financial and reputational struggles, investors might consider diversifying their investing portfolio by buying stocks that could potentially benefit from the situation. One such company is Dell Technologies, which has shown growth potential in its infrastructure solutions business and has a history of collaborating closely with major tech players like Nvidia.

Given the market's current undervaluation of Dell, its stock price is trading at a substantial discount compared to other IT infrastructure providers, including Arista Networks and the S&P 500's average forward P/E ratio. With Dell already having a substantial portion of its backlog related to Nvidia products, any potential shifts in supplier orders could further boost its growth prospects.

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