OpenAI introduced its conversational intelligence application ChatGPT in November 2022. Since then, artificial intelligence (AI) has become one of the hottest investment themes on Wall Street, and AI stocks Super Micro Computer (NASDAQ: SMCI) and Nvidia (NASDAQ: NVDA) have been the best-performing members of the S&P 500 (SNPINDEX: ^GSPC).

Specifically, Supermicro and Nvidia saw their shares surge 650% and 1,030%, respectively, over the last two years as unprecedented demand for AI infrastructure led to phenomenal financial results. Consequently, both companies reset their soaring share prices earlier this year by completing 10-for-1 stock splits.

However, businesses are still in the early stages of building out their AI infrastructure, and Wall Street believes continued investments in supercomputing chips and servers will drive shares of Supermicro and Nvidia higher over the next 12 months. Here are price targets provided by The Wall Street Journal:

• Among the 20 analysts following Supermicro, the average price target is $67.50 per share. That forecast implies 41% upside from its current share price of $48.

• Among the 64 analysts following Nvidia, the average price target is $150 per share. That forecast implies 7% upside from its current share price of $140.

Here's what investors should know about Supermicro and Nvidia.

1. Super Micro Computer

Super Micro Computer manufacturers high-performance computing platforms, including servers and full server racks, optimized for AI. The company handles most product development and assembly internally at facilities in Silicon Valley, and it uses electronic building blocks to rapidly build a broad range of servers featuring the latest chips. That often allows Supermicro to bring new products to market two to six months before its competitors.

In March, Rosenblatt analyst Hans Mosesmann wrote, "Super Micro has developed a model that is very, very quick to market. They usually have the widest portfolio of products when a new product comes out." That time-to-market advantage, coupled with broad product selection, has carried Supermicro to the forefront of the AI server industry, which is forecast to grow at 30% annually through 2033.

Supermicro reported mixed results in the fourth quarter of fiscal 2024 (ended June 30). Revenue increased 143% to $5.3 billion, but gross margin contracted almost 6 percentage points to 11.2%, and non-GAAP (generally accepted accounting principles) net income increased only 78%. Margin contraction may be a symptom of diminished pricing power amid increased competition, but management expects gross margin to normalize between 14% and 17% as liquid-cooled servers ship in higher volume toward the end of fiscal 2025.

Importantly, short-seller Hindenburg Research accused Supermicro of accounting manipulation in August, and The Wall Street Journal said the company was being investigated by the Justice Department in September. Supermicro was fined in 2020 for accounting manipulation, prior to which the stock was temporarily delisted from the Nasdaq Exchange because the company filed its Form 10-K for fiscal 2017 nearly two years late.

A similar sequence of events is playing out this time around. Supermicro has yet to file its Form 10-K for fiscal 2024, despite it being due on Aug. 29, and the company has received a letter of noncompliance from the Nasdaq Exchange. While delisting is not imminent and the situation may be resolved without issue, investors should know Supermicro is a risky stock due to the regulatory issues hanging over the company.

Having said that, Wall Street still expects the company's earnings to increase 54% over the next 12 months, which makes its current valuation of 21.7 times adjusted earnings look quite cheap. At that price, risk-tolerant investors can buy a small position in Supermicro stock, provided they know regulatory issues could make shares volatile in the coming months.

2. Nvidia

Dan Ives at Wedbush Securities has called Nvidia the "foundation of the AI revolution." Its graphics processing units (GPUs) power the most advanced artificial intelligence systems, such that the semiconductor company has more than 80% market share in AI accelerators. That leadership is reinforced by CUDA, a robust ecosystem of software tools that lets developers write GPU-accelerated applications across numerous domains, from computational chemistry to machine learning.

Beyond that, Nvidia has a key advantage in its full-stack computing platform that spans hardware, software, and services. Since acquiring networking specialist Mellanox in 2019, Nvidia has secured a leadership position in generative AI networking equipment, according to Morningstar. Nvidia has also introduced its first server central processing unit (CPU), and its software and services business is expected to reach a $2 billion revenue run rate this year.

Grand View Research estimates AI accelerator sales will increase at 29% annually through 2030, while spending across AI hardware, software, and services compounds at 36% annually. Nvidia is one of the companies best positioned to benefit, given that it participates in so many parts of the AI economy, and dominates the AI accelerator market. "Competing with Nvidia, a company that spends over $10 billion per year in R&D, is a difficult feat," according to analysts at Morgan Stanley.

Wall Street expects Nvidia's adjusted earnings to increase 54% over the next year. That estimate makes the current valuation of 63.3 times adjusted earnings look fair. To be clear, the stock is not cheap, nor is it outrageously expensive. Patient investors should feel good about buying a small position in Nvidia today.

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Trevor Jennewine has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.

2 Stock-Split Artificial Intelligence (AI) Stocks Up 650% and 1,030% in 2 Years to Buy Now, According to Wall Street was originally published by The Motley Fool