Explore these Three Artificial Intelligence Chip Companies Worth Investing in by 2025
The year 2024 marked a significant leap in artificial intelligence (AI), with generative AI finding its way into mainstream use and AI-related stocks propelling the market to new heights. The semiconductor sector, in particular, thrived, as AI chips provided the necessary computing power for training large language models and running AI inference.
In 2025, it appears that spending on AI infrastructure will hit new highs. Companies like Microsoft are preparing to invest a whopping $80 billion in AI data centers this year alone. This spending spree is not limited to Microsoft, as other tech giants like Alphabet, Amazon, and Meta Platforms have also announced plans to increase their AI infrastructure budgets.
Let's delve into three AI chipmakers that stand to gain from this spending surge.
1. Nvidia
Nvidia, the reigning monarch of AI infrastructure, has amassed a significant market cap, thanks to its innovative graphics processing units (GPUs). Originally designed for high-level graphics rendering, its GPUs have now found a secondary purpose in AI after Nvidia introduced the CUDA software program. This free software, initially created to sell more GPUs, has since become a standard for programming these chips.
Nvidia has expanded its offerings with developer tools and micro libraries that provide an attractive moat for the company. As a result, it currently holds about a 90% market share in the GPU space. With tech giants racing to develop new AI models, they often rely on Nvidia's GPUs to meet their computing power needs. Given Microsoft's announced plans to boost its AI data center investments, Nvidia is well-positioned to reap the benefits.
Trading at a forward price-to-earnings ratio (P/E) of 31 times and a PEG of 0.98, Nvidia's stock remains attractive, with undervalued status often associated with a PEG below 1.
2. Advanced Micro Devices
Advanced Micro Devices, though not as dominant as Nvidia, still capitalizes on the AI data center buildout. Last quarter, its data center segment revenue skyrocketed 122% year over year to $3.5 billion, primarily driven by the sales of its Instinct GPUs and EPYC CPUs.
Advanced Micro Devices has continually raised its data center GPU revenue forecast for 2024. Originally targeting a revenue of $2 billion, the company now anticipates exceeding $5 billion. Microsoft, Meta Platforms, and Oracle are among its notable clients using its MI300X GPUs, with a focus on AI inference.
While Advanced Micro Devices continues to benefit from the GPU wave, it has also made strides in the server CPU market. Last quarter, the company reported increasing market share with its EPYC CPUs in cloud computing infrastructure. The pending acquisition of ZT Systems is expected to further solidify its position as a full-fledged data center solution provider.
Trading at a mere forward P/E of 17 times, Advanced Micro Devices offers undervalued investment potential.
3. Broadcom
Broadcom specializes in designing custom AI chips, known as ASICs. These specialized chips, though less flexible than GPUs, offer better performance and energy efficiency for specific tasks. Broadcom's custom chips have recently gained traction, with Alphabet, Meta Platforms, ByteDance, OpenAI, and Apple as its prominent clients.
Last quarter, Broadcom revealed that its three largest "hyperscaler" clients (those owning massive data centers) could potentially deploy up to 1 million AI chips each by 2027, representing an investment opportunity of between $60 billion and $90 billion. Broadcom manufactures specialty networking chips that help these AI chips communicate more efficiently. With two new custom chip clients on the horizon, this potential opportunity could grow even larger.
Though Broadcom's stock currently trades at a higher forward P/E of 36 times, its other chip businesses are presently experiencing cyclical troughs, while its AI chip business boasts substantial future growth potential.
In light of the tech giants' plans to invest heavily in AI infrastructure, Nvidia, with its dominant market share in GPUs and attractive developer tools, is expected to significantly benefit from increased demand for its chips in AI data centers. (money, investing, finance)
Advanced Micro Devices, while not as dominant as Nvidia, is still benefiting from the AI data center buildout, with its data center GPU revenue forecasted to exceed $5 billion in 2024, thanks to its partnerships with major tech companies and promising acquisitions. (money, investing, finance)
