"Top-down" analysis is a valid way of going about finding fantastic stocks. It entails finding a country or industry with above-average growth prospects, then investing in it, either through a sector-specific exchange-traded fund, or the very best individual stocks in that area.
Looking out to 2030 from where we stand today, the following megatrends seem to be excellent places to search for the next big stock. In fact, if you're not invested at least partially in these two growth industries, you should consider adding exposure to them right away.
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Artificial intelligence (AI)
It's perhaps no surprise that the first megatrend is artificial intelligence. Ever since OpenAI's ChatGPT was released to the public last November, the investing public has been tantalized by the prospects of what AI can do for humanity, and for our portfolios.
Unlike some other hyped-up trends, generative AI appears to be the real deal. Innovation in advanced semiconductors along with transformer technology, in which an AI can train itself in an "unsupervised" manner, has led to tremendous recent breakthroughs.
UBS Global Wealth Management forecasts the AI services and hardware market will grow at a 20% average growth rate through 2025, although the UBS division chief also noted: "Our estimate may prove to be conservative as growth in [large language models] and other generative AI technologies could be even faster than we expect given advancements in machine learning and deep learning capabilities." Precedence Research is even more optimistic, forecasting a 38.1% average growth rate for the AI industry between 2022 and 2030 -- although Precedence may calculate the components of the AI industry in a different way than UBS does.
On that theme, an analysis by global consulting firm PwC indicates AI could add a whopping $15.7 trillion to the world economy by 2030 -- a significant addition to today's global gross domestic product (GDP), which sits at roughly $101 trillion.
AI stocks are hot right now; they include OpenAI investor Microsoft (MSFT -3.94%) and graphics processing unit (GPU) semiconductor leader Nvidia (NVDA 2.48%). But really, a lot of the modern technology ecosystem is bound to benefit, as AI drives up the need for computing power more broadly. And with many cloud computing and semiconductor stocks still well off their highs -- thanks to the decline in PCs and smartphones, and the economic slowdown -- there's no shortage of opportunities to invest in AI today.
Some relatively low-risk places to look include the three large cloud infrastructure-as-a-service (IaaS) providers, as well as some best-of-breed semiconductor stocks.
More specifically, those cloud computing data centers are packed with servers from companies like Dell Technologies (DELL 1.06%) and Super Micro Computer (SMCI 2.19%). Those servers are in turn packed with processors from designers like Nvidia or rival Advanced Micro Devices (AMD 0.50%), whose chips are manufactured by third-party foundries such as Taiwan Semiconductor Manufacturing (TSM 0.86%). And those foundries use specialized machines to manufacture leading-edge chips from the likes of ASML Holding (ASML 0.08%) or Applied Materials (AMAT -0.50%).
As AI drives up the need for computing power, that should benefit this entire tech ecosystem and value chain.
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Electrification and decarbonization
Another megatrend that should surprise no one is electrification, as virtually all major economies work on decarbonizing their utility and transportation sectors in order to hit emissions goals and lower their dependence on fossil fuels. This is happening across the automotive and power generation, distribution, and transmission industries in concert.
Very popular ways to play this trend have been electric vehicle (EV) stocks, such as market leader Tesla (TSLA 2.67%), and charging-station companies like ChargePoint (CHPT -4.26%). After all, battery-powered and plug-in hybrid EVs accounted for just 13.4% of all vehicles sold last year, up from 4.2% in 2020, but they're on their way to making up roughly 50% of sales by 2030, according to S&P Global.
However, chasing that growth by investing in original equipment manufacturers (OEMs) and charging-station companies can be risky. Tesla is the undisputed leader in the EV space, but its stock is very expensive, at 47 times earnings. Other legacy OEMs are in the middle of their electrification transition, with uncertain results. And upstart all-electric brands such as Rivian Automotive (RIVN -3.45%) and Lucid Group (LCID -5.10%) are burning through cash as they try to scale up amid supply shortages and rising interest rates.
The same cash-burn concerns are also there for the pure-play vehicle charging-station companies, which tend to sell their systems at low gross margins in hopes of increased usage later on. But in an age of higher interest rates and low profits, they're also a risky bet.
Once again, it may be semiconductor and semiconductor-equipment makers that stand to benefit the most. Electric vehicles require a lot more semiconductors than vehicles based on internal combustion engines. By 2027, semiconductor content in the leading EVs is forecast to be roughly triple the chips that an internal combustion car has today.
Those chips include microcontrollers ("MCUs"), power semiconductors, and sensors. Moreover, tomorrow's power semiconductors will use new and innovative materials such as gallium nitride (GaN) and silicon carbide (SiC), which have greater conductive qualities and heat resistance than silicon chips.
Unlike expensive or loss-making EV and charging-station stocks, the large MCU, power chip, and sensor chip companies are generally profitable and trade at quite reasonable valuations today. Some top names include Texas Instruments (TXN -0.92%), which is a top provider of both MCUs and power semiconductors; ON Semiconductor (ON 0.59%), which has a top-five market share in both power chips and sensors; and German behemoth Infineon Technologies (IFNNY 3.87%), which has a top-five share in all three key types of chips: MCUs, power chips, and sensors.
Another play might be semiconductor capital ("semi-cap") equipment maker Aehr Test Systems (AEHR -1.30%). That stock has been on quite a run, but Aehr is a leader in testing and burn-in machines for both GaN and SiC chips, which are projected to grow at explosive rates in the years ahead. As long as it maintains its tech lead in this niche, Aehr also looks to be a big beneficiary of the electrification trend.
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On the utility side, investors have quite a number of options. These include the utilities themselves, and companies that invest in power generation to sell to those utilities. In addition, investors could buy stocks of solar panel or wind turbine manufacturers, or even the miners for key raw materials like copper and lithium that are crucial to the electrification transition.
One solid choice in the utility space is NextEra Energy (NEE -0.75%), which is both a utility and a power producer, with leading renewables generation. NextEra owns the largest U.S. utility, Florida Power and Light, and is one of the world leaders in generating power from the wind and sun. And the company has even bigger ambitions to help build the distribution and transmission infrastructure necessary to connect renewable sources to the modern grid.
Another dividend-paying play is Freeport-McMoRan (FCX 0.23%), the largest U.S.-based copper miner and the second-largest in the world. FCX also produces some gold and molybdenum for good measure, but copper is the key element in the electrification megatrend.
A riskier but still potentially attractive play is First Solar (FSLR -3.79%), the leader in thin-film solar panels, based here in the U.S. First Solar has best-in-class technology, but had been hampered for years by competition from low-cost imports. However, the stock has more than tripled since last summer, when the Inflation Reduction Act was passed. Not only did that law provide handsome subsidies for solar deployment, but it also put in protectionist "made in America" provisions that should help First Solar a great deal.
Looking ahead
There are a lot of stocks to consider among those above, but going through these AI and clean-energy names and their close peers may be worth it. Leading companies within strong growth trends tend to do well over time.
Especially for younger investors, it's absolutely crucial to add stocks levered to the AI revolution and clean-energy transition to your portfolio. And with the difficult market we've had over the past 18 months, many can be had at reasonable or even bargain prices today.
