When it comes to AI chip stocks, there are plenty of imitators. As a result, it makes it very difficult to know which ones to buy and hold through thick and thin.
Some AI chip stocks are easy to identify as millionaire makers. The leader of the pack is Nvidia (NASDAQ:NVDA).
Cathie Wood sold too soon. The media wondered: Did Cathie Wood make a mistake selling Nvidia? As I write this after hours on Aug. 23, NVDA is up over $502 on record sales and earnings. Assuming Wood sold below $234, she’s missed a boatload of gains because of her quant theories.
Don’t worry; if Nvidia’s share price goes to hell in the future, you can bet that every other AI stock will, too. Nvidia is the thousand-pound gorilla of AI.
So, who are the three AI chip stocks to hold through thick and thin? Nvidia’s one, but it’s so obvious I have to give you others.
Here are three that can go the distance over the next 10 to 15 years.
Texas Instruments (TXN)
Texas Instruments (NASDAQ:TXN) is in a lull right now. Its stock is down nearly 2% over the past year. NVDA stock over the same period is up 174%. Like I said, it’s in a funk.
But as I’ve said in the past few years, it’s a free cash flow dynamo. That’s why I called it a high-tech dividend stock to buy and hold in September 2022.
“I selected Texas Instruments because it is a company obsessed with capital allocation. It even has a corporate presentation stating, ‘We run the company with the mindset of being a long-term owner. We believe that growth of free cash flow per share is the primary driver of long-term value,’” I wrote last September.
When I wrote those words, its free cash flow (FCF) compound annual growth rate (CAGR) between 2004 and 2021 was 12%. Due to a slowdown in 2022, its CAGR over the last 18 years is 11%. That’s still very impressive.
Regarding an FCF slowdown, Texas Instruments’ FCF in 2022 was $5.92 billion [cash flow]. In the trailing 12 months ended June 30, it was $3.18 billion, down significantly from a year ago.
However, the company continues to invest in its business. In the trailing 12 months ended June 30, its capital expenditures were $4.19 billion, 49% higher than a year earlier. In the near term, that lowers its free cash flow.
In the long term, it’s golden.
Advanced Micro Devices (AMD)
If Nvidia Chief Executive Officer (CEO) Jensen Huang is my favorite tech leader, Advanced Micro Devices (NASDAQ:AMD) CEO Lisa Su is runner-up. Perhaps because she’s a woman in a male-dominated industry, she’s tied with Huang.
They’re both really good. And, as it turns out, they’re loosely related. I guess the apple doesn’t fall very far from the tree.
AMD stock is having a great year, up 76%. Unfortunately, NVDA is up nearly three-fold on its chief rival.
InvestorPlace’s David Moadel recently discussed how Carolina Panthers owner David Tepper bought 2.3 million shares of AMD through his Appaloosa LP hedge fund in the second quarter, a sign the billionaire thinks Su’s going to bring the heat over the next few quarters, putting a scare into Nvidia.
That’s not new.
Until NVDA went on its latest run last October, AMD had a better five-year return. Only in May did Nvidia create some separation, and that was all due to artificial intelligence (AI). Unfortunately, Su will have to pull several rabbits out of her hat for AMD shareholders if she wants her firm to compete at Nvidia’s level regarding AI.
Wccf tech reported that “Bernstein analyst Stacy Rasgon believes that NVIDIA is a class apart from all other technology companies when it comes to meeting the first wave of AI product demand.”
Still, something tells me Su will figure out how to get AMD into AI meaningfully in the next two to three years.
NXP Semiconductors (NXPI)
It’s been a long time since I’ve written about NXP Semiconductors (NASDAQ:NXPI), so I’m grateful my InvestorPlace colleague, Larry Ramer, recently discussed it. It’s been on a roll, hence the 90+ relative strength score.
Up nearly 30% in 2023, it’s delivered for shareholders. But what’s next?
In the company’s Q2 2023 analyst call, Chief Financial Officer (CFO) Bill Betz had some optimistic things to say about the company’s quarter.
“Cash flow from operations was $756 million. And net capex was $200 million or 6% of revenue, resulting in non-GAAP free cash flow of $556 million or 17% of Q2 revenue. On a trailing 12-month basis, this represents a 20% free cash flow margin,” Betz stated.
“We continue to be focused on driving non-GAAP free cash flow margin to greater than 25%, a level we have demonstrated in the past and a level we believe we can achieve in the future.”
If you look at the company’s Q2 2023 results, forget the flat revenue growth and instead focus on the 9% year-over-year growth of its automotive segment, its most significant, generating 57% of its $3.3 billion in total revenue.
The automotive segment will drive NXP’s business. It’s looking good.
On the date of publication, Will Ashworth did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
