Last week, Nvidia (NASDAQ:NVDA) crossed the $1 trillion benchmark, a milestone that was not unexpected. Speculation on the next trillion-dollar company had been rife, and Nvidia, with its strong competitive advantage in AI, was a top contender.
However, the idea of buying Nvidia at $400 might make some investors uncomfortable. The semiconductor business is notoriously cyclical, and while Nvidia is expected to rise further in the short term, a pullback to the $300 range as the hype fades is predicted.
Reflecting on the early 2010s, iPhone chip stocks dominated the news. Smartphones necessitate hundreds of low-powered microprocessors and sensors, and companies like Skyworks Solutions (NASDAQ:SWKS) stepped in to fill this new demand.
However, it wasn’t a smooth journey. Skyworks’ shares fell over 30% on at least four occasions on its way from $10 to $100. Even the mighty Intel (NASDAQ:INTC) has become a roller-coaster ride.
This volatility makes finding “millionaire maker” stocks – defined as consistent growth companies for long-term investors – surprisingly difficult in the world of AI chip companies. Every semiconductor boom has eventually turned into a bust, turning high-quality companies into money furnaces overnight.
However, for investors seeking millionaire-makers, there are still plenty of attractive choices as the artificial intelligence industry develops. While Nvidia remains a top medium-term pick, here are five stocks that could do even better from an investment standpoint…
ASML Holding’s (NASDAQ:ASML) dominance over the lithography industry mirrors Nvidia’s lead in discreet graphics cards in several ways. The Netherlands-based firm holds a virtual monopoly in its industry.
Semiconductor product development cycles are particularly long, which means minor stumbles by Canon and Nikon have left them years behind. ASML’s initial lead allows it to reinvest more money into research and development (R&D) than competitors can afford, creating a virtuous feedback loop.
ASML’s sharp management has wisely kept the firm’s leverage low and cash balances high, enabling the cycle to continue. It has been noted that ASML’s shares could double to the $500 billion range.
Nvidia’s prosperity, brought about by the proliferation of AI, should indirectly benefit ASML, since the latter company makes the equipment used to make NVDA’s chips.
The greatest competition for Nvidia will eventually come from its own customers: Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT), and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL). These tech giants are already designing their own AI-tailored chips to reduce costs.
That’s where Marvell Technology (NASDAQ:MRVL) comes in. Marvell is a Silicon Valley-based semiconductor firm that designs high-performance chips for the data center and enterprise networking industries, among others.
Tech giants need these third-party firms, and Marvell is particularly well suited. The company’s system-on-a-chip (SoC) products are designed for specific applications, which makes them cheaper and better-performing than general-purpose GPUs at particular tasks.
41% percent of the firm’s revenue already comes from data centers, up from 35% in 2021. The firm also trades at a historic discount because of its historically choppy profits. Semiconductor demand is relatively cyclical, and even Marvell’s fabless strategy is affected by demand busts.
Marvell is finally reaching a tipping point. It has been picked out as a stock to buy before it soars to new heights in 2023. Marvell might seem like an unusual millionaire-maker stock. But a significant change in its business promises to turn the company into the Nvidia of data centers.
Teradyne (NASDAQ:TER) is a Boston-based firm that focuses on testing equipment for semiconductors. It’s a highly profitable industry that’s becoming even more important as chips begin to get stacked vertically. Plus, an upcoming jump to 3-nanometer chips will further increase the demand for chip testing.
This comes as welcome news for Teradyne, a firm already twice as profitable as Nvidia, based on its return on invested capital (ROIC). The company has seen profits rise 2X since 2018, and analysts project another 34% increase by 2025.
Teradyne’s results are possible because chip testing requires increasingly complex sensors that can pinpoint where manufacturing errors occur. The company’s latest machine, for instance, took over five years and $500 million of research budget to develop.
3D stacking will soon become the norm for AI chips. And that makes Teradyne a bet that’s hard to beat.
The comparison between Nvidia and Advanced Micro Devices (NASDAQ:AMD) is often likened to Uber vs. Lyft… Google vs. Yahoo. AMD has long struggled to keep up with its better-funded rival.
The company has only an 8% market share in the GPU market, compared with Nvidia’s 88%, and has generated profits in only eight of the past 15 years. However, the chipmaking industry always has room for second acts.
And with AI applications bolstering the need for high-end chips, Wall Street analysts now expect AMD to see data center sales grow 29% annually for the next five years, driven by its dominance in X86 architecture popular among the PC and server markets.
In that sense, Nvidia vs. AMD looks a little more like the Microsoft vs. Apple rivalry of the late 1990s. Back then, No. 2 Apple (NASDAQ:AAPL) wisely decided to stop fighting its rival in the PC market to become No. 1 in music players and smartphones.
Today, AMD is making a similar push to leave its struggling GPU business behind. Its 2022 acquisition of Xilinx was a great first step, and many more are anticipated.
What are the best AI stocks to buy today? Should you chase the rally in red-hot AI chipmaker Nvidia ? Or maybe buy the breakout in the AI software company C3.ai Inc. (AI)? Or is a hardware play more like Tesla Inc. (TSLA) the best AI stock to buy right now?
To answer that, consider the development of smartphones. First, the “picks-and-shovels” plays break out. In the early 2010s, we saw semiconductor stocks like Qualcomm (NASDAQ:QCOM) outperform, much like how Nvidia is doing today.
Next, hardware makers began to do well. Software and services eventually followed several years later. Zebra Technologies (NASDAQ:ZBRA) straddles the second and third categories.
The firm produces tablets, barcode printers, and other specialized devices, and it has become a leader in the automatic identification and data capture (AIDC) industry. Zebra has also pursued bolt-on acquisitions such as Antuit.ai, a software company that helps retailers and manufacturers forecast future demand.
Analysts expect the company to generate steady double-digit profit growth after 2024.
The semiconductor industry has long been torn about Intel, a former superstar. On the one hand, Intel’s investment in chipmaking plants (known as foundries) have become a millstone across its neck.
Foundries are supremely expensive to build, and their values can collapse when chipmaking enters a down cycle. Missing out on next-gen technology – as Intel has done with sub-10-nanometer chips – can set a foundry back several years.
In other words, Intel finds itself in a cyclical, capital-intensive business that reminds us more of Detroit automakers or airlines than high-tech growth.
On the other hand, Intel’s business is far from dead. Analysts expect a 13% increase in revenue next year, and Intel will catch up to Taiwan Semiconductor Manufacturing (NYSE:TSM) by 2025 when its latest manufacturing site comes online.
We can thank $15 billion of tax incentives for that feat. Intel is also making progress in quantum computing, a high-potential industry that could vault Intel back into the market’s good graces.
Now is the time to go after Intel because of its cutting-edge achievements in the AI world and its forward-looking investments in next-generation U. S.-based semiconductor production. Much more is anticipated for Intel and other AI-focused companies as the adoption and improvement of AI becomes more widespread.
Because companies that you wouldn’t even necessarily associate with AI — like makeup brands, miners, industrial solutions providers, and even renewable energy managers — are beneficiaries of this massive megatrend.
As of this writing, LONG positions in GOOG and GOOGL are held. The opinions expressed in this article are those of the writer, subject to publishing guidelines.
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