The world is becoming increasingly digital, particularly as artificial intelligence becomes more prominent. At the heart of this transformation are semiconductors and the companies that make them. Chip stocks are an appealing opportunity for investors looking to capitalize on the technology of tomorrow.
Graphics processing units are the key ingredient for powering generative AI applications. As artificial intelligence evolves, the demand for high-performance computing power is also growing.
Semiconductors are the engines driving this revolution, powering complex algorithms that can generate new content, design innovative products, and even predict market trends.
And this no flash in the pan. Chip stocks represent companies that are capitalizing on a fundamental shift that will define the next era of technological advancement.
Granted, the tech industry and chip stocks took a downturn in the last couple of weeks as investor fears of a bubble resurfaced. But I don’t see it that way.
In fact, I see this as an opportunity to capitalize on market weakness and to buy the best chip stocks at a discounted rate.
I’m using the Portfolio Grader to find the best chip stocks that are playing a key role in generative AI. By investing in these chip stocks, you too can ride the wave of innovation into the future.
Nvidia (NVDA)
You can’t talk about chip stocks without first addressing Nvidia (NASDAQ:NVDA). The company has roughly a 90% market share in making GPUs that power generative AI applications.
Its stock soared over the last two years, and at one point this year was responsible for roughly one-third the return of the S&P 500.
Nvidia stock is down 10% in the last month, but there’s a big date coming up – on Aug. 28, Nvidia will report earnings for its second quarter of fiscal 2025.
If history is any indication, this is a date that will push NVDA stock higher once again.
Nvidia’s 2025 Q1 revenue was up 262% from a year ago. And while that’s an unsustainable growth rate over the long term, Nvidia is still projecting $28 billion in revenue for the quarter. And if can beat those figures, NVDA stock is going to skyrocket again.
But investors should also keep a close eye out for any guidance updates that Nvidia issues. This is a time to be optimistic about Nvidia, but that doesn’t mean being reckless.
NVDA stock is up 134% in the last year and gets an “A” rating in the Portfolio Grader.
Broadcom (AVGO)
Broadcom’s (NASDAQ:AVGO) products are used for data centers, networking, storage, software, wireless and industrial products. It has an earnings report coming up soon as well, as the company is expected to announce third-quarter results on Sept. 5.
Analysts are expecting Broadcom to report earnings of $1.21 per share. And as Broadcom has a track record of quarterly EPS beats, investors can justifiably anticipate a strong quarter.
Broadcom has been on a winning streak following its acquisition of VMware, which gave Broadcom access to VMware’s hybrid cloud platform to provide corporate customers with the power of a cloud network with data centers on site.
Broadcom also uses Nvidia GPUs to let its customers run AI models, which is critically important for many companies.
Broadcom’s upcoming earnings release should be solid. But as I recently suggested, there’s no need to over-invest in Broadcom stock. Maintain a reasonable position size, just in case high hopes lead to a letdown from Broadcom.
AVGO stock is up 40% this year and gets a “B” rating in the Portfolio Grader.
Taiwan Semiconductor Manufacturing (TSM)
Taiwan Semiconductor Manufacturing (NYSE:TSM), also known as TSMC, is just as essential to generative AI as Nvidia. I don’t think you can understate the company’s contributions.
While Nvidia and other semiconductor companies are responsible for creating and designing GPUs, they don’t actually make them. That’s the responsibility of fabricators like TSMC, which is the most prominent semiconductor fabricator in the world.
TSMC has a 61% market share in the global semiconductor foundry market. Demand for its services is increasing as companies such as Nvidia design more powerful chips for TSM to produce.
It’s also a good bet for investors who are looking to hedge their bets amid increasing geopolitical tensions between the U.S. and China.
Chip companies in China are designing less-powerful processors specifically so they can retain TSMC as a chip producer, according to published reports.
TSMC is increasing its investment in Arizona, where it agreed in April to use $6.6 billion in CHIPS Act funding to build a third fabrication plant in the Phoenix area.
For July, TSMC reported 45% year-over-year growth. That comes off a strong second quarter earnings report that included revenue of $20.82 billion, up 32.8% from last year.
TSM stock is up 65% this year and gets a “B” rating in the Portfolio Grader.
Micron Technology (MU)
Micron Technology (NASDAQ:MU) makes products for memory and storage technologies, including DRAM, NAND and NOR technology. But its place on this list of chip stocks with a hand in AI is won for its partnership with Nvidia.
Micron makes the world’s leading High-Bandwidth Memory 3E, or HMB3E, architecture.
It provides higher bandwidth than previous generations of memory, while being smaller and using less energy. Nvidia uses the HBM3E architecture in its latest graphics processing units, including the new H200.
The company also recently announced the development of PCIe Gen6 data center solid-state drive technology as part of its portfolio of memory and storage products to support increased demand for AI.
SSD drives represent the new generation of storage devices in computers because they have transfer data faster than hard disk drives while also having shorter boot times and increased bandwidth.
Micron created a chip that operates AI applications in Lenovo (OTCMKTS:LNVGY) laptops. The chip will be used in Lenovo’s ThinkPad P1 Gen 7 laptops.
The company’s innovations are reflected in its earnings reports. Earnings for the fiscal third quarter of 2024 showed revenue of $6.8 billion versus $3.75 billion in the same quarter a year ago.
MU stock is up 14% this year and gets a “B” rating in the Portfolio Grader.
Applied Optoelectronics (AAOI)
Now we are getting into some smaller companies on our list. But they still are strong AI plays, and it’s important for any portfolio to be diversified. After all, it doesn’t make sense to put all of your holdings into Nvidia or TSM.
One chip stock to consider closely is Applied Optoelectronics (NASDAQ:AAOI). The Texas-based company makes and supplies fiber-optic networking products, including diode lasers, photodiodes, subassemblies and more. Its customers are in China, Taiwan and the U.S., and its products are used in data centers and telecom products.
Revenue in the second quarter was $43.2 million, up from $41.6 million a year ago. But notably, data center revenue was up to $34.3 million from $27.5 million.
That’s because the company put more resources into that growing field and less into telecom and CATV – both of which saw shrinking revenue for the quarter.
I like AAOI as long as Applied Optoelectronics continues to focus on its data center growth. And the third quarter is expected to see even better results, as the company is guiding for revenue between $60 million and $66 million for Q3.
AAOI is deeply discounted right now, off 58% for the year, but I’m projecting a much better second half. It gets a “B” rating in the Portfolio Grader.
AXT (AXTI)
AXT (NASDAQ:AXTI) makes high-performance compound and single element semiconductor substrate wafers that are used when a typical silicon wafer substrate cannot meet the performance requirements of a semiconductor or optoelectronic device.
Its products are used in 5G infrastructure, data center connectivity, passive optical networks, LED lighting, lasers, sensors, power amplifiers for wireless devices and satellite solar cells.
Like Taiwan Semiconductor, AXT is a good chip stock for investors who are looking to hedge their bets with companies that have a foothold in both China and the U.S.
While AXT is based in California, its Chinese subsidiary Tongmei has similar functions and products to serve the Chinese market.
Earnings for the second quarter included revenue of $27.9 million, up from $18.6 million a year ago. The company reported an operating loss of $1.9 million, but that was greatly improved from its loss of $6.8 million in Q2 2023.
AXTI is down less than 1% for the year, showing significant volatility. It currently has a “B” rating in the Portfolio Grader.
Alpha and Omega Semiconductor (AOSL)
Alpha and Omega Semiconductor (NASDAQ:AOSL) is a California company that supplies, designs and develops power semiconductors, which control motors and lighting systems. Power semiconductors can handle high voltage levels and are optimized to minimize power loss and quickly dissipate heat.
The company has more than 2,300 products to serve automotive, cloud, computing, consumer and industrial customers. Its products are for portable computers, graphic cards, flat-panel TVs, etc.
“We are excited about opportunities in A.I. and we are working on multiple prospects,” CEO Stephen Chang said in a statement. “Looking to the next cycle, we are poised for growth, bolstered by advanced technology, a diversified product portfolio addressing a broadening array of end markets, and a premier customer base across all business lines.”
Earnings for the fiscal fourth quarter of 2024 (ending June 30) included revenue of $161.3 million, up from $150.1 million a year ago. The company reduced its quarterly losses to $1.5 million and 9 cents per share from a loss of $10.5 million and 39 cents per share.
AOSL stock is up 38% this year and gets a “B” rating in the Portfolio Grader.
On the date of publication, Louis Navellier had a long position in NVDA. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article.
The InvestorPlace Research Staff member primarily responsible for this article had a long position in NVDA but did not have (either directly or indirectly) any other 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.
On the date of publication, the responsible editor did not have (either directly or indirectly) and positions in the securities mentioned in this article.
