Rising interest rates dragged down many growth stocks over the past two years. However, many tech stocks in the artificial intelligence (AI) market bucked that slowdown as the generative AI market expanded.
The bears might argue those AI stocks are stuck in a bubble, but the bulls believe the top names still have plenty of room to run as the market expands. With interest rates expected to decline over the next year, many of those high-flying names could attract even more investors and set new record highs.
Let's review the three top AI stocks that could head even higher if the Federal Reserve cuts the prime lending rate: Nvidia (NVDA 1.59%), Broadcom (AVGO 4.37%), and Arm Holdings (ARM 7.98%).
Image source: Getty Images.
1. Nvidia
Nvidia is the world's largest producer of discrete GPUs. Its GPUs were once mainly used to power graphically intensive video games, but it now generates most of its revenue by selling high-end server GPUs for data centers. Traditional CPUs can only process a single piece of data at a time, but Nvidia's GPUs can process a wide range of integers and floating numbers simultaneously. That makes them much more effective for processing complex machine learning and AI tasks.
NASDAQ: NVDA
Key Data Points
The explosive growth of the AI market lit a fire under Nvidia's data center business over the past two years, and all of the world's leading AI companies -- including OpenAI, Microsoft, and Alphabet's Google -- currently use Nvidia's chips to power their generative AI applications.
From fiscal 2024 to fiscal 2027 (which ends in January 2027), analysts expect Nvidia's revenue to grow at a compound annual growth rate (CAGR) of 47% as its EPS rises at a CAGR of 55%. That bright outlook suggests its stock still isn't too expensive at 50 times forward earnings -- and it could attract even more investors as interest rates decline.
2. Broadcom
Broadcom produces a broad range of wireless, optical, and data storage chips. It also expanded into the infrastructure software market over the past several years. It mainly serves the mobile, industrial, telecom, data center, and automotive markets, and its sales generally ebb and flow with those sectors' cyclical growth cycles.
NASDAQ: AVGO
Key Data Points
However, Broadcom has also evolved into an AI play over the past few years. As data centers upgrade their servers with Nvidia's GPUs, they're also purchasing more of Broadcom's optical and data storage chips to process all of that information. That's why it expects to generate at least $11 billion in AI chip revenue in fiscal 2024 (which ends this October). That would account for more than a fifth of its projected revenue.
From fiscal 2023 to fiscal 2026 (which ends in October 2026), analysts expect Broadcom's revenue and EPS to grow at a CAGR of 23% and 16%, respectively. That growth should be driven by its robust sales of AI-oriented chips, the cyclical recovery of its other markets, and the ongoing expansion of the infrastructure software business. It still looks reasonably valued at 28 times its forward adjusted earnings, and it might command an even higher valuation in a lower-interest-rate environment.
3. Arm Holdings
Arm designs power-efficient chips for a wide range of chipmakers. It doesn't produce any chips on its own -- it merely licenses its designs to its customers and generates most of its revenue from royalties and licensing fees. Arm's focus on power efficiency over raw processing power made it a popular option for mobile chipmakers like Qualcomm, MediaTek, and Apple.
NASDAQ: ARM
Key Data Points
That's why Arm-based chips drove Intel's more power-hungry designs out of the mobile market over the past decade. Today, Arm-based chips can be found in about 99% of all premium smartphones. Many automotive systems are also powered by Arm-based chips, and several leading Arm chipmakers have been gradually rolling out Arm-based PC and server chips.
From fiscal 2024 to fiscal 2027 (which ends in March 2027), analysts expect Arm's revenue to grow at a CAGR of 23% as its EPS increases at a CAGR of 60%. That growth should be driven by the market's surging demand for its AI-optimized Armv9 chip designs for the mobile, cloud, and automotive markets. Arm's stock isn't cheap at 87 times its forward adjusted earnings, but it might impress more investors with its booming AI business as interest rates come down.
