The massive investment underway to transition traditional computing in data centers to accelerated computing for artificial intelligence (AI) is a major catalyst for leading chip stocks.
Applications using generative AI could add trillions of value to the global economy, according to JPMorgan. Here are two leading semiconductor companies supplying the hardware to make this happen.
Nvidia
Nvidia (NVDA 1.07%) is estimated to control 80% of the market for chips used for AI, and that lucrative position provides the company with tremendous profits to fund years of innovation. The company's graphics processing units (GPUs) are used by OpenAI's ChatGPT and all the leading cloud services. Nvidia posted triple-digit revenue growth last year, with demand pointing to another strong year of growth in 2024.
NASDAQ: NVDA
Key Data Points
The stock has climbed 78% just since the beginning of the year, but that's largely because investors are still catching up to the incredible growth the company is experiencing. Surging demand for its GPU systems pushed Nvidia's adjusted profit up 286% last year to $32 billion.
In March, Nvidia unveiled the new Blackwell GPU-based platform that features 208 billion transistors, providing the computing power for generative AI requirements. Amazon, Tesla, Meta Platforms, and Microsoft are among some of the companies expected to adopt Blackwell.
Nvidia is dominating the market for AI chips because of its previous expertise in designing graphics processors used for playing video games. CEO Jensen Huang's forward thinking led the company to adapt its GPU technology to several markets, including self-driving cars, robotics, and supercomputers for AI. Its ability to adapt makes Nvidia a solid buy-and-hold investment.
I wouldn't underestimate the company's ability to keep growing for many years. Wall Street analysts have been raising their growth forecast and currently expect Nvidia's earnings to grow at 35% per year on an annualized basis. With the stock's forward price-to-earnings (P/E) ratio at 36, it still offers attractive long-term return potential.
Marvell Technology
One name that many investors are growing more optimistic about in the semiconductor industry is Marvell Technology (MRVL +2.35%). The company's products, including ethernet adapters and storage solutions, help data centers move, store, and process data. The stock has climbed 76% over the last year, as its data center business is experiencing strong demand.
NASDAQ: MRVL
Key Data Points
Marvell's revenue grew just 1% last quarter, but its data center revenue grew 54% year over year to a record $754 million, with AI revenue over $200 million. The current Wall Street estimate has the company's total revenue increasing by 42% over the next two years to reach $8.4 billion.
The company expects to see softness in certain markets in the near term, such as consumer applications, wireless products, and enterprise networking. But it's guiding for sequential growth in data centers next quarter. Management sees a lot of opportunities related to AI and is continuing to invest for more growth.
These results show that Marvell will be a major beneficiary of the massive ramp of investment in data center infrastructure. Data centers are rapidly upgrading components to handle the large data streams that AI training requires. Specifically, Marvell's AI-related revenue has grown from 3% in fiscal 2023 to 10% in fiscal 2024.
The forward P/E has stretched to a premium of 49, but analysts expect Marvell's long-term earnings growth to increase at an annualized rate of 26%. Like Nvidia, this is also a profitable business that is generating growing free cash flow, making the stock a solid buy-and-hold investment.
