Artificial intelligence (AI) has been powering strong gains for the stock market this year, and some analysts believe that the AI-driven run is just getting started. But while much of the excitement surrounding this hot new tech trend naturally centers around software, the AI revolution wouldn't be possible without semiconductors.
Two Motley Fool contributors were asked to offer analysis on top semiconductor companies for new growth phases thanks to the rise of artificial intelligence. Here's what they had to say.
1. Nvidia will power the increasing use of artificial intelligence
Parkev Tatevosian: Semiconductor giant Nvidia (NVDA 6.18%) saw a slowdown in its expansion in 2023 as two primary sources that use its graphic processing units (cryptocurrency mining and personal computers) dealt with reduced consumer demand. Despite that slowdown, Nvidia forecast a return to outsized growth in the next quarter as demand driven by the rising interest in artificial intelligence is boosting its prospects.
Management guided for revenue of $11 billion in fiscal 2024's Q2. That would be a sharp increase from the $8.3 billion in revenue it generated in the first quarter (ended April 30). The expansion will likely be just the beginning, as developing effective use of AI technologies requires expansive computing power. Large language models like OpenAI's ChatGPT are the most popular use of AI at the moment. Perhaps in the next decade, driverless car technology will be the next revolutionary step in AI.
NVDA PE Ratio (Forward 1y) data by YCharts
Regardless of the application, the one thing that is likely to remain constant is the heavy computing power requirements. This is where Nvidia can step in and generate tremendous sales growth. Nvidia's excellent prospects from this source are no secret to the market. Nvidia's stock is trading at a forward price-to-earnings ratio of roughly 41, near the most expensive the stock has traded for in over 15 months.
ASML's tech is making the AI revolution possible
Keith Noonan: ASML (ASML 2.04%) is one of the world's most important semiconductor equipment manufacturers, and its technologies play a key role in pushing AI tech forward. The company's deep ultraviolet (DUV) and extreme ultraviolet (EUV) lithography machines print incredibly small semiconductor designs and are used for the fabrication of chips capable of running artificial intelligence applications and other software.
In particular, ASML's EUV lithography machines pave the way for next-generation AI-focused applications. These machines are instrumental in the creation of the 5-nanometer chips used in Nvidia's most advanced processors, and they will continue to be one of the driving factors in pushing semiconductor capabilities forward.
Thanks to strong demand for its lithography machines, the Netherlands-based company recorded impressive growth. In the second quarter, its sales rose 27% year over year to hit 6.9 billion euros ($7.55 billion), and net income soared 38% to reach 1.94 billion euros ($2.12 billion).
While trends toward commodification tend to push margins down for hardware-focused businesses, that's unlikely to happen to ASML. For starters, the types of semiconductor lithography machines that the company manufactures are incredibly expensive to make and are sold to a relatively small handful of customers. ASML also holds patents on EUV lithography that effectively make it the only producer of machines that are central to the fabrication of certain highly advanced semiconductors.
Thanks in part to the rise of AI, the semiconductor equipment leader actually has far more demand than it can meet right now. At the end of the second quarter, the company had an order backlog of approximately 38 billion euros (roughly $41.6 billion), and it's poised for strong margins as EUV machines come to make up a larger portion of its sales mix.
Nvidia and ASML are clear category leaders
While Nvidia is designing top-of-the-line processors that make it possible to run advanced artificial intelligence software, ASML is producing machines that make it possible to manufacture these highly advanced chips. Both companies are playing key roles in pushing AI forward and are already seeing demand for the revolutionary tech elevate their top and bottom lines, but it's important to keep in mind this trend is still just starting to unfold. As category leaders with strong competitive advantages in their respective corners of the semiconductor market, Nvidia and ASML are poised to enjoy long-term tailwinds thanks to the rise of AI.
