The artificial intelligence (AI) revolution appears to be the real deal rather than hype. After all, ChatGPT was by far the fastest app to reach 100 million users – in just two months! In a recent interview, Cathy Gao, a partner at venture capital firm Sapphire Ventures, predicted “a future where AI becomes so ubiquitous that companies will no longer present themselves as ‘AI companies’ because they are all become AI companies.”
Along with falling inflation, enthusiasm for AI has boosted Magnificent Seven stocks are significantly higher this year. But while the Mag Seven have been propelled by their leadership in cloud and semiconductors, many other crucial companies within the AI ecosystem will also benefit.
The following three stocks look like great additions to any AI portfolio beyond the seven popular stocks, making this a nice top 10.
Semiconductor manufacturing in Taiwan
Whether or not Nvidia or another of its promising competitors leads the artificial intelligence chip race, Semiconductor manufacturing in Taiwan (NYSE:TSM)known as TSMC, will make all or most of these chips.
TSMC pulled ahead of other foundries about five years ago in terms of chipmaking process technology and has since increased that lead. So all the world’s leading AI companies, from Nvidia to Advanced microsystems Cloud computing giants that design their AI chips in-house all rely on TSMC to manufacture them. In fact, despite its already massive market share, TSMC increased its foundry market share in the third quarter from 56.4% to 57.9%, according to TrendForce. The second largest competitor, Samsung, held only 12.4% share.
This is why TSMC was able to easily raise prices and pass on costs during the period of high inflation following the peak of the pandemic, which caught the attention of Warren Buffett – at least temporarily.
What’s also very attractive is that TSMC trades at a lower multiple than the market, at just 17 times its forward earnings estimates, and pays a sizable 1.84% dividend, which is expected to grow over time. ‘future.
Of course, there are some risks, as with any stock in the fast-moving technology sector. On the one hand, Samsung and Intel have declared their intention to catch up with TSMC in 2025, when the industry transitions to 2nm chips. Additionally, Buffett said he sold TSMC shortly after buying it due to its location in Taiwan, which China claims as its own territory.
But both of these concerns may be overblown. Although some customers may outsource some of their production to other foundries, TSMC’s manufacturing momentum, scale and expertise are likely difficult to replicate. TSMC will therefore probably also be the leader in the sector in a few years. Additionally, TSMC is opening new factories in the United States, Japan and Europe, somewhat mitigating geopolitical risk. And TSMC’s low multiple also means that investors are already paying a discounted price today.
At a high level, TSMC is one of the most important companies in the AI chip manufacturing ecosystem, making it a valuable investor choice in the AI era.
Much like TSMC, whichever chipmaker wins the AI war, many of those chips will run on Super microcomputer (NASDAQ:SMCI) waiters.
Super Micro stock has tripled this year, so some may think they missed the big opportunity. But just like TSMC, the stock only trades for about 17 times its earnings estimates for fiscal 2024, with SMCI’s fiscal year ending in June.
While server makers are often seen as commoditized businesses that assemble proprietary chips and networking hardware, the demands of artificial intelligence are putting more emphasis on server design.
This is where Super Micro shines. Its innovative “building block” architecture allows it to quickly create highly customized servers with extremely rapid time-to-market. Additionally, Super Micro has been an innovator in energy-efficient server designs, often making it the least expensive option for data center operators when considering power and storage requirements. cooling. Super Micro’s latest feature is liquid cooling systems, which will likely be required in most AI-oriented data centers in the future due to their massive power consumption and heat generation.
Management is forecasting growth of around 40% for the current year, but that appears to be just the beginning. Last quarter, Super Micro reported that more than 50% of its revenue came from artificial intelligence server systems, which is a much higher proportion than competing server makers. This means that the growth of AI will have a much greater impact for Super Micro than for its competitors.
Last positive point, Super Micro is still managed by its founder Charles Liang, who holds 14.3% of the company’s shares, with a long-term incentive plan it is also very attractive for current shareholders.
Like the aforementioned actions, Broadcom (NASDAQ:AVGO) has also performed well in 2023, and while it trades at a reasonable multiple of around 24 times forward estimates, those earnings estimates are likely too low. Indeed, it’s difficult to quantify Broadcom’s recent $69 billion acquisition of VMware, which was just completed in November.
While VMware didn’t have much profit on its own, Broadcom has already cut costs and integrated the software giant into its corporate structure. Earlier this month, two Wall Street analysts wrote that they believed the VMware acquisition could bring $12.50 in earnings per share to Broadcom in the coming year, propelling its earnings well above the average analyst estimate today. In fact, both of these analysts believe Broadcom could earn $60 per share in 2024, which would mean the stock would trade at just under 19 times those estimates, or below the market multiple.
VMware could be very valuable in the AI era, as a software platform that can seamlessly connect different public and private clouds to on-premises data centers. In the future, businesses will likely need to store and transfer data across different platforms to leverage the different AI capabilities offered by each, increasing the importance of VMware.
Additionally, Broadcom’s networks segment will also get a major AI boost. Broadcom’s leading switching and routing chipsets will be needed to capture data around data centers at the ultra-fast speeds needed for AI computing. Second, Broadcom owns the intellectual property for custom AI accelerators, currently used by several cloud giants designing their own custom AI chips. While Alphabet uses Broadcom’s IP in its Tensor Processing Units (TPUs), other cloud giants are also following suit by creating their own custom chipsets, increasing the opportunities.
While CEO Hock Tan pointed out that AI-related revenues accounted for only 15% of Broadcom’s semiconductor revenues in 2023, he expects that proportion to rise to more than 25% by during the coming year. This also makes it one of the top AI stocks to own beyond the Magnificent Seven.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Billy Duberstein holds positions in Alphabet, Broadcom, Super Micro Computer and Taiwan Semiconductor Manufacturing and has the following options: January 2025 sale of $110 puts on Super Micro Computer, January 2025 sale of $125 puts on Super Micro Computer, January 2025 sale of $130 puts on Super Micro Computer, short January 2025 $280 calls on Super Micro Computer, short January 2025 $380 calls on Super Micro Computer and short calls from $85 in January 2025 on Super Micro Computer. Its clients may hold shares of the companies mentioned. The Motley Fool holds positions and recommends Advanced Micro Devices, Alphabet, Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom, Intel, and Super Micro Computer and recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, and short February 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.
3 Top AI Stocks to Buy Beyond the “Magnificent Seven” was originally published by The Motley Fool