Semiconductor stocks have taken off big-time in the past year. The PHLX Semiconductor Sector index gained an impressive 51% during this period thanks to the booming chip demand triggered by the growing adoption of artificial intelligence (AI) applications.
Semiconductors play a central role in the AI revolution. The training of AI models such as OpenAI's ChatGPT was made possible using chips designed by the likes of Nvidia (NVDA 0.03%). This explains why Nvidia's AI-focused graphics processing units (GPUs) have been selling like hotcakes over the past 18 months, leading to a sharp jump in Nvidia's revenue and earnings.
NVDA Revenue (TTM) data by YCharts
The market rewarded Nvidia handsomely for its stellar growth. That's evident from the 225% jump in the company's stock price in the past year. It won't be surprising to see Nvidia maintain its outstanding momentum as well thanks to expectations of strong top- and bottom-line growth. However, Nvidia is not the only company in the hardware supply chain driving the AI revolution.
Here's a closer look at five other names playing a central role in the AI hardware market.
These server manufacturers are winning big from AI adoption
While the likes of Nvidia, Intel, and Advanced Micro Devices make or design chips that are used for addressing AI workloads such as training large language models (LLMs) and for inferencing purposes, those chips need to be mounted on a server infrastructure that's specifically designed for running AI workloads. Dell Technologies (DELL 2.11%) and Super Micro Computer (SMCI 3.84%) are two names benefiting big-time from the growing need for AI-optimized servers.
While shares of Dell have jumped 184% in the past year, Supermicro stock has rocketed higher, with eye-popping gains of 847%. Despite these massive jumps, both stocks still trade at attractive multiples. Dell has a sales multiple of just 0.9, while Supermicro's reading stands at 5.6. Their sales multiples are lower than the Nasdaq-100 Technology Sector index's average price-to-sales ratio of 7.3.
A closer look at how AI drives their growth will demonstrate why investors bought their stocks hand over fist in the past year. It also explains why they are still worth buying. Dell, for instance, is set to return to growth in the current fiscal year after struggling in the previous one because of weak personal computer (PC) sales.
Its top line fell 14% in fiscal 2024 (which ended on Feb. 2, 2024) to $88.4 billion. Dell has guided for $93 billion in revenue in the current year at the midpoint of its guidance range, and the demand for AI servers is one of the reasons behind its turnaround. Dell shipped $800 million worth of AI-optimized servers last quarter. Even better, its AI server backlog almost doubled quarter over quarter to $2.9 billion thanks to a 40% sequential increase in AI server orders.
The good part is that Dell's AI server order book could keep getting fatter. The AI server market is set to grow from an estimated $30 billion last year to $150 billion in 2027, according to Foxconn. This is precisely the reason why even Super Micro Computer stock has turned out to be a stock market favorite in the past year.
Supermicro's growth has been stunning with its revenue in the ongoing fiscal year 2024 set to double to $14.5 billion from $7.1 billion in fiscal 2023. More importantly, the server manufacturer claims that its production capacity is solid enough to support more than $25 billion in annual revenue. This explains why analysts have significantly raised their revenue estimates for the next couple of years. However, it won't be surprising to see the company crushing those expectations thanks to its capacity expansion moves.
SMCI Revenue Estimates for Next Fiscal Year data by YCharts
Memory and custom chips also saw a robust AI-driven boom
Memory chips from the likes of Micron Technology (MU -0.42%) are helping Nvidia manufacture powerful AI GPUs. This explains why Micron sold out its entire 2024 capacity of high-bandwidth memory (HBM) chips that are deployed in AI chips, while also allocating an "overwhelming majority" of its HBM production line for next year.
HBM is deployed to increase the speed at which data is fed to AI processors, significantly boosting the performance of AI processors. This explains why Nvidia and AMD have been packing more HBM into their AI chips, driving impressive growth for Micron. The memory specialist's revenue was up 58% year over year last quarter to $5.8 billion. It is expecting stronger growth of 76% in revenue in the current quarter to $6.6 billion from $3.75 billion in the year-ago quarter.
Analysts expect Micron to finish the year with a 57% spike in revenue to $24.3 billion followed by another impressive year in fiscal 2025 with an estimated revenue jump of 42%. With shares of Micron currently trading at 6.4 times sales despite rising 95% in the past year, buying it looks like a smart thing to do as the HBM market could generate $49 billion in annual revenue in 2030 as compared to $857 million last year.
Another chipmaker benefiting from the AI chip market is Broadcom (AVGO -0.41%), a stock that has jumped 106% in the past year. In February, J.P. Morgan analyst Harlan Sur pointed out that Broadcom is set to become the second-largest AI chip company in 2024 with an estimated revenue of $8 billion to $9 billion thanks to customers such as Alphabet and Meta Platforms for whom it makes custom AI chips.
But when Broadcom released its fiscal 2024 first-quarter results, management said that its AI chip revenue is set to exceed $10 billion in the current fiscal year. However, don't be surprised to see Broadcom exceeding that mark as it recently added a new customer for its custom AI chips. Wall Street analysts believe that the newly added customer could be Amazon, Apple, or TikTok parent ByteDance.
It is easy to see why Broadcom's AI customer pipeline is increasing. Cloud companies are looking to develop custom chips for running AI workloads to reduce costs, consume less power, and improve performance. This explains why Morgan Stanley predicts custom chips will account for 30% of the $182 billion AI semiconductor market in 2027, indicating that Broadcom's addressable market in AI chips could be worth almost $55 billion in three years.
So, Broadcom's AI business could keep growing at a nice clip moving forward, which is why buying the stock now could be a good idea as it is trading at 28 times forward earnings, in line with the Nasdaq-100's forward earnings multiple and lower than Nvidia's reading of 36.
The bonus pick
All the above-mentioned names supply AI hardware, but it eventually comes down to electronics manufacturing services providers such as Jabil (JBL 1.35%) to make the end products. This stock is trading up 52% in the past year but recently took a big hit. Savvy investors, however, would do well to take a look at the bigger picture.
From designing and sourcing components to assembling the final product, Jabil products and services are deployed to reduce costs and enhance efficiency. Not surprisingly, Jabil saw a big surge in AI-related orders. Management pointed out on its recent earnings conference call that its "AI GPU volume in the first half of 2024 is 200x that of the level of 2023."
Even better, Jabil points out that its AI-related revenue is set to increase by 20% in fiscal 2025 to $6 billion. That would be 20% of the company's top line based on the consensus estimate of $30 billion in revenue for fiscal 2025.
Jabil's AI business could keep growing in the future as the company claims that it is "winning share across multiple end markets in the AI data center infrastructure space." That's why investors would do well to take a closer look at this AI stock that's trading at just 0.5 times sales and 21 times trailing earnings before it steps on the gas.
