3 artificial intelligence (AI) stocks to buy if the Fed cuts interest rates

Rising interest rates have pushed many growth stocks lower over the past two years. However, many technology stocks in the artificial intelligence (AI) market have bucked this slowdown as the generative AI market has expanded.

Bears might argue that those AI stocks are stuck in a bubble, but bulls believe the top names still have plenty of room to run as the market expands. With interest rates expected to fall over the next year, many of these top names could attract even more investors and set new records.

Let’s review the three top AI stocks that could head even higher if the Federal Reserve cuts its key lending rate: Nvidia (NVDA 1.46%), Broadcom (AVGO 1.11%)and Arm holds (ARM 1.78%).

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1. Nvidia

Nvidia is the world’s largest manufacturer of discrete GPUs. Its GPUs were primarily used to power graphically intensive video games, but it now generates most of its revenue by selling high-end server GPUs for data centers. Traditional processors can only process a single piece of data at a time, but Nvidia GPUs can process a wide range of integers and floating-point numbers simultaneously. This makes them much more efficient for processing complex machine learning and AI tasks.

The explosive growth of the artificial intelligence market has caused a fire in Nvidia’s data center business in the past two years, and all the world’s leading artificial intelligence companies, including OpenAI, Microsoftand AlphabetGoogle — they currently use Nvidia chips to power their generative AI applications.

From fiscal 2024 to fiscal 2027 (ending January 2027), analysts expect Nvidia’s revenue to grow at a compound annual growth rate (CAGR) of 47% as its EPS grows to a CAGR of 55%. That bright outlook suggests its shares still aren’t too expensive at 50 times forward earnings — and could attract even more investors as interest rates fall.

2. Broadcom

Broadcom makes a wide range of wireless, optical and data storage chips. It has also expanded into the infrastructure software market over the past few years. It primarily serves the mobile, industrial, telecommunications, data center and automotive markets, and its sales generally ebb and flow with the cyclical growth cycles of these sectors.

However, Broadcom has also evolved into an AI game in recent years. As data centers upgrade their servers with Nvidia GPUs, they also buy more Broadcom optical and data storage chips to process all that information. That’s why it’s expected to generate at least $11 billion in AI chip revenue in fiscal year 2024 (which ends in October). This would represent more than a fifth of the estimated revenues.

From fiscal 2023 to fiscal 2026 (which ends in October 2026), analysts expect Broadcom’s revenue and EPS to grow at a CAGR of 23% and 16%, respectively. This growth should be driven by its robust sales of AI-oriented chips, cyclical recovery in other markets and continued expansion of its infrastructure software business. It still looks reasonably valued at 28 times forward adjusted earnings and could be valued even higher in a lower interest rate environment.

3. Supporting the arms

Arm designs energy-efficient chips for a wide range of chip manufacturers. It doesn’t manufacture any chips itself — it just licenses its designs to customers and generates most of its revenue from royalties and licensing fees. Arm’s focus on energy efficiency over raw processing power has made it a popular choice for mobile chipmakers such as QualcommMediaTek and Apple.

That’s why they drove Arm-based chips IntelThe most power-hungry designs in the mobile market in the last decade. Today, Arm-based chips can be found in about 99% of all premium smartphones. Many automotive systems are also powered by Arm-based chips, and several Arm chipmakers have gradually released chips for Arm-based PCs and servers.

From fiscal 2024 to fiscal 2027 (ending March 2027), analysts expect Arm’s revenue to grow at a CAGR of 23% as EPS grows at a CAGR of 60%. This growth should be driven by growing market demand for AI-optimized Armv9 chip designs for the mobile, cloud and automotive markets. Arm shares aren’t cheap at 87 times adjusted forward earnings, but it could impress more investors with its booming artificial intelligence business as interest rates fall.