2 Best Artificial Intelligence (AI) Stocks to Buy Now: AI Chip Edition

Artificial intelligence (AI) is poised to be one of the biggest disruptive secular growth trends of all time. Most sources estimate that the global artificial intelligence market will have a compound annual growth rate (CAGR) in the range of 30% to 40% through 2030, with 2030 market sizes ranging from over $800 billion to more of 1 trillion dollars.

The AI ​​revolution has been in full swing for the past few years, but it just kicked into high gear at the start of 2023. This came after the advent of generative AI, which greatly expanded the potential use cases for AI. Generative AI stunned the tech world when OpenAI launched its ChatGPT chatbot in late 2022.

There are several main ways to invest in AI. This article focuses on companies that largely develop and supply semiconductors or “chips” and other technologies to enable AI capabilities.

Best AI Chip/Technology Stocks

Data sources: Yahoo! Finance and YCharts. Data through August 23, 2024. P/E = price-earnings. EPS = earnings per share. *Arm supported initial public offering (IPO) in September 2023.

Let’s put the 10-year percentage gains in monetary terms. Here’s what $1,000 invested a decade ago in each of the following would be worth now:

• Broader Market (S&P 500): $3,410
• Nvidia: $283,200 (yes, more than a quarter of a million dollars)

1. Nvidia

To call Nvidia “dominant” in the AI ​​chip space is an understatement. The company’s graphics processing units (GPUs) are the gold standard for accelerating the processing of AI workloads in data centers.

By all accounts, Nvidia has over 90% share of the data center GPU AI chip market and over 80% of the total data center AI chip market. Advanced microdevices CEO Lisa Su predicts that the fast-growing data center AI chip market will reach $400 billion in revenue by 2027, which equates to an average annual growth rate of about 73%.

Nvidia isn’t a pure AI play, but it’s as close as you can get in the semiconductor space. The data center market platform accounted for 87% of its revenue in the quarter ended April, and this business largely provides chips and related technologies (including network technology and software) to enable AI and high-performance computing .

AI is also enhancing Nvidia’s offerings in its other platforms, which include PC gaming (10% of last quarter’s revenue), professional visualization (1.9%) and automotive and robotics (1.5%).

Nvidia is scheduled to report its results for the second quarter of fiscal 2025 (ended in late July) on Wednesday, August 28 after the market closes. Management guided for revenue to rise 107% year-over-year to $28 billion. It also guided (indirectly by providing a lot of inputs) for adjusted earnings per share (EPS) of $6.22, or 130% growth.

2. Supporting the arms

UK-based Arm designs architectures for central processing units (CPUs) and licenses those designs and related intellectual property (IP) to customers. Its clients include many of the biggest names in consumer technology and semiconductors, including AppleNvidia and Qualcomm.

Arm, founded in 1990, was instrumental in enabling the smartphone revolution. Its chip architecture is very energy efficient, enabling smartphones to have good battery performance, which has led to their rapid adoption. Arm-based chips are found in about 99% of smartphones, as well as countless other small form factor products.

In recent years, the company has expanded into higher-value markets such as data center servers, AI accelerators, and application (app) processors for smartphones. AI is driving growth in all of these markets. The company said in its latest earnings report that “the substantial power requirements of AI are driving the growth of Arm’s compute platform, which is the most energy-efficient solution available.”

In late July, Arm reported its results for the first quarter of fiscal 2025, which ended at the end of June 2024. Revenue rose 39% year over year to $939 million, sprinting with the Wall Street consensus estimate of $908 million. Licensing revenue rose 72% to $472 million, and royalty revenue rose 17% to $467 million.

Even better news for investors is that Arm’s profit grew even more than its revenue, meaning its profit margin continued to expand. Adjusted for one-time items, net income was $419 million, or $0.40 per share, up 67% year over year. That result easily beat the $0.34 that analysts were expecting.

We’ve included the adjusted net income figure to highlight how extremely profitable Arm is. Its adjusted profit margin in the quarter was 44.6% ($419 million divided by $939 million).

What about the valuations for Nvidia and Arm shares?

Nvidia stock trades at 47 times estimated earnings for the current fiscal year. That’s big in a vacuum — but reasonable for a company that Wall Street expects to grow earnings at an average annual rate of 46.4% over the next five years. Moreover, Nvidia is easily beating earnings estimates, so 46.4% is likely to prove too low.

Arm’s stock is incredibly expensive. It trades at 86 times estimated earnings for the current fiscal year. That’s a lot not only in a vacuum, but for a company that Wall Street projects will grow earnings at an average annual rate of 31.2% over the next five years.

So why do I consider Arm stock the second best AI technology stock (after Nvidia) to buy right now? I’m working on a full article on why it’s worth paying for Arm stock, so suffice it to say there’s good reason to believe Wall Street is significant underestimating Arm’s earnings growth potential. In each of the company’s four quarters as a public company, it has topped analysts’ consensus revenue estimates.

That said, before making an investment decision, some investors may want to watch Arm for two more quarters to see if it continues to produce robust top- and bottom-line growth and navigate Wall Street estimates.