History Says S&P 500 Could Rise: 2 Monster Stocks to Buy, According to These Wall Street Analysts

The S&P 500 it has exploded 49% since hitting its low in 2022. The good news is that we are less than two years into this bull market, and the average bull market lasts 4.9 years, with an average return of 177%, according to Stifel. History says investors are looking at a few years of easy pickings.

Leading semiconductor makers serving the training needs of artificial intelligence (AI) have seen their stock prices rise over the past year. But two Wall Street analysts see a bigger upside for the next stock.

1. Supporting the arms

Arm holds‘ (ARM 1.86%) the stock price has risen over the past year as data centers and device makers have increasingly used Arm-based chips due to their high performance and energy efficiency. AI will be a key growth driver for the semiconductor industry over the next decade. while Nvidia dominates the graphics processing unit (GPU) market, companies are also investing in custom central processing units (CPUs).

Arm licenses its CPU products and then charges royalties for each chip shipped that uses the company’s technology. It’s a very profitable business model, which is why William Blair analyst Jason Ader rates the stock with an Outperform (Buy) rating. The company’s revenue from licenses and royalties translates into an adjusted operating profit margin of 48%. Very few companies earn such high margins, and that’s one factor fueling the stock higher.

Arm chips are used in virtually every smartphone around the world, but are also gaining market share in several other markets, including consumer electronics, cloud computing, networking, automotive and the Internet of Things. According to William Blair, there is more than $200 billion worth of chips in these markets.

Arm’s high-margin business has a long tailwind of growth in a semiconductor industry that is expected to grow 10% annually, according to Statista. Arm’s revenue rose 39% year-over-year due to higher royalties and market share gains. The stock trades at an expensive price-to-earnings ratio, but cost-averaging investors in the stock should earn big returns over the long term.

2. Marvell technology

Generative AI is a subset of the AI ​​market that fuels the development of new software and generates substantial growth for data centers and cloud service providers. These AI applications can create images and videos from simple text instructions, which requires tremendous computing power and massive amounts of data.

Marvell technology (MRVL 3.19%) is well positioned to benefit. The company provides chips and software that help components transmit data faster. Its products are used in a variety of markets, including self-driving cars, data centers and consumer electronics.

Roth MKM analyst Suji Desilva likes Marvell’s opportunity in custom AI chips. Last quarter, the company ramped up the first two chips as part of its custom AI silicon program. Data center revenue grew 92% year-over-year, and management forecasts that this will accelerate in the third quarter, with a larger contribution coming from custom AI silicon.

The analyst sees many opportunities for Marvell to participate in the growing development of AI infrastructure. Indeed, the infrastructure for AI data centers is completely different from standard cloud infrastructure. These new data centers need thousands of AI accelerators or GPUs, and these GPUs require much more robust network systems to send data back and forth for the AI ​​to work. This is fueling demand for Marvell’s flagship electro-optical products.

However, Marvell still reported a 5% year-over-year revenue decline last quarter. This is due to weak sales in non-AI businesses such as enterprise and carrier networks, but a recovery here will become another growth catalyst. These businesses are already showing solid sales performance, and management expects its enterprise and carrier networking businesses to post sequential growth in the third quarter.

The consensus on Wall Street has Marvell’s earnings up slightly for the full year. Looking ahead to next year, revenue is expected to grow by 35%. Once Marvell is firing on all cylinders, the stock could rise, so now is a great time to buy the stock.