Nvidia just announced some good news for Supermicro Computer stock.

stock super micro computer (SMCI -5.42%) It has risen over the last year, giving it a 1,180% return as of this writing, and the biggest reason the stock has soared is because of a surge in demand. nvidia‘S (NVDA -0.12%) Artificial intelligence (AI) graphics card.

Supermicro’s modular server rack-scale systems are being used to equip AI-related graphics cards from Nvidia and other chipmakers. As demand for Nvidia cards grew, Supermicro saw a significant increase in demand for its server solutions, leading to rapid growth in the company’s revenue and bottom line.

SMCI Revenue (Quarterly) data from YCharts

And now, a recent revelation from Nvidia CEO Jensen Huang suggests that Supermicro’s stellar growth will continue.

Adoption of Nvidia’s water cooling system will improve Super Micro Computer.

Nvidia’s current flagship AI graphics card, H100, is known to perform well in air-cooled environments. Additionally, according to Tom’s Hardware, the upcoming H200 processors are expected to perform optimally when air-cooled. But at an economic summit in Stanford this week, Huang said one of Nvidia’s next-generation computers will be water-cooled.

NVIDIA’s next-generation AI graphics processing unit (GPU) based on the Blackwell architecture is expected to consume 40% more power than existing products based on the Hopper architecture. Some other claims suggest that Nvidia’s next-generation AI chips may consume twice as much power as the current lineup. This is where liquid-cooled server systems come into play.

When Supermicro launched what it claimed to be the first water-cooled server system for Nvidia’s H100 processors last year, it said:

Data center power savings are estimated at 40% when using Supermicro liquid cooling solutions compared to air-cooled data centers. Additionally, direct cooling cost savings of up to 86% can be realized compared to existing data centers.

Third-party research suggests something similar. Liquid cooling is known to consume only 20% of the energy required for air cooling. In other words, water cooling is known to significantly reduce the energy consumption of data centers while also helping to reduce operating costs by reducing water usage compared to air-cooled data centers.

Supermicro appears to have been ahead of its time as it took the lead in launching a liquid cooling solution for Nvidia’s AI chips last year. The company is currently working to increase its manufacturing capacity for water-cooled server racks. During the January earnings conference call, Supermicro executives said: “By the June quarter of this year, we will have significant dedicated capacity to manufacture 100 to 120 kilowatt racks with liquid cooling and DLC, Direct Liquid Cooling Racks. “We will provide capacity to produce up to 1,500 racks per month and by then our total rack production capacity will be up to 5,000 racks per month.”

Companies focused on expanding the capacity of water-cooled servers can not only leverage Nvidia’s power-hungry AI chips, but also make an overall impact in the fast-growing water-cooled data center market. The water-cooled data center market’s annual sales, which were only $4.5 billion last year, are expected to reach $40 billion in 2033, recording an average annual growth rate of 24% over the next 10 years.

So it wouldn’t be surprising to see Supermicro maintain a healthy growth rate for a long time to come.

There is no need to buy stocks because of their appreciation.

Supermicro has suffered a slump in the stock market over the past year, but its sales multiple is only 6.7. This is cheaper than the technology sector’s price-to-sales ratio of 7.1. Moreover, taking into account Supermicro’s forward earnings multiple of 84, Supermicro’s forward earnings multiple of 36 points represents a significant improvement in its bottom line.

As the following chart shows, Supermicro’s earnings are expected to rise significantly from $11.81 per share in the previous fiscal year.

SMCI EPS estimates for current fiscal year data from YCharts

It’s also worth noting that analysts have increased their earnings growth expectations for the company and will likely continue to increase these estimates, taking into account additional catalysts such as increased demand for liquid cooling systems. That’s why now might be a good time for investors to buy this AI stock, as it looks like it can sustain its incredible rally over the long term.