This article is an excerpt from the InvestorPlace Digest newsletter. To get news like this delivered straight to your inbox, click here.
I’ll admit to feeling some self-satisfaction last week when Nvidia (NASDAQ:NVDA) crossed over the $1 trillion benchmark.
At InvestorPlace.com, our free market news website, we’ve been betting on what would be the next trillion-dollar company. And the high-end chipmaker was the No. 1 company on my list … in large part because it has an unusually strong competitive advantage in AI.
Still, I don’t blame you if buying Nvidia at $400 makes you feel queasy.
Semiconductors are a notoriously cyclical business, and I expect Nvidia to rise further in the near term before eventually pulling back to the $300 range as the hype inevitably wears off.
Consider what happened in the early 2010s when iPhone chip stocks dominated the news.
Smartphones require hundreds of low-powered microprocessors and sensors, and companies like Skyworks Solutions (NASDAQ:SWKS) filled this newly created gap.
But it wasn’t smooth sailing. Shares of Skyworks would fall 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.
That’s what makes “millionaire maker” stocks – which we at InvestorPlace.com define as consistent growth companies for long-term investors – surprisingly difficult to find in the world of AI chip companies. Every semiconductor boom has eventually turned into a bust, turning high-quality companies into money furnaces overnight.
Nevertheless, investors seeking millionaire-makers still have plenty of attractive choices as the artificial intelligence industry develops. And while Nvidia remains a top medium-term pick, here are five stocks that our writers at InvestorPlace.com believe could do even better from an investment standpoint…
1. ASML (ASML)
ASML Holding’s (NASDAQ:ASML) dominance over the lithography industry mirrors Nvidia’s lead in discreet graphics cards in several ways…
- Business. 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.
- R&D. 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.
- Financing. ASML’s sharp management has wisely kept the firm’s leverage low and cash balances high, enabling the cycle to continue.
Last week, InvestorPlace.com writer Larry Ramer 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.
I certainly agree. Though investors will need some patience to see 2X gains, the lithography firm remains one of our writers’ top long-term picks.
2. Marvell (MRVL)
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.
Nevertheless, we here at InvestorPlace.com believe Marvell is finally reaching a tipping point…
Last week, Joel Baglole picked out the firm 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.
3. Teradyne (TER)
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 (). 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.
It’s also why InvestorPlace.com writer Will Ashworth recently recommended Teradyne in his article “3 Hidden Gems in the AI Stock Market That You Need to Know About.”
3D stacking will soon become the norm for AI chips. And that makes Teradyne a bet that’s hard to beat.
4. Advanced Micro Devices (AMD)
I’m rarely a fan of second-best companies. Uber vs. Lyft… Google vs. Yahoo … and Nvidia vs. AMD.
Advanced Micro Devices (NASDAQ: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.
InvestorPlace.com writer Josh Enomoto considers these facts in an article this week, “Is Advanced Micro Devices the Next Nvidia?”
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 we anticipate many more to come.
5. Zebra Technologies (ZBRA)
This week, InvestorPlace analyst Luke Lango asked a straightforward question:
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, he considered the development of smartphones in his “millionaire’s playbook.”
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 () industry. Zebra has also pursued bolt-on acquisitions such as Antuit.ai, a software company that helps retailers and manufacturers forecast future demand.
Together, these acquisitions are turning Zebra into another of InvestorPlace.com writer Will Ashworth’s hidden AI gems. Analysts expect the company to generate steady double-digit profit growth after 2024.
Zebra’s recent pullback offers an attractive entry point to long-term investors.
And on Tuesday, June 6, at 7 p.m. Eastern, Luke is hosting a big event in order to explain how the decisions you make in the next few days could be what makes or breaks your financial future for years to come.
According to Luke, there will be winners and losers when it comes to what he’s calling the coming 2023 “tech melt.” Click here to save your spot.
Closing Thoughts: What About Intel?
Our writers and I have long been torn about Intel, a former superstar in the semiconductor industry.
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.
John Blankenhorn also rightly notes at InvestorPlace.com that Intel is also making progress in quantum computing, a high-potential industry that could vault Intel back into the market’s good graces.
InvestorPlace analyst Eric Fry, for his part, thinks 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.
And he anticipates much more to come 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, Tom Yeung held LONG positions in GOOG and GOOGL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.comPublishing Guidelines.