These companies can make the most of the growing adoption of artificial intelligence in the long run.
Artificial intelligence (AI) has turned out to be a big growth driver for technology stocks in 2023, which explains why the tech-laden Nasdaq-100 Technology Sector index has soared 44% so far this year.
The good part is that AI technology is currently in its early phases of growth, and it is expected to boom big time in the long run. According to one estimate, the global AI market could generate annual revenue of $1.85 trillion in 2030, which would be a massive jump over last year’s market size of $142 billion. This means companies looking to capitalize on the proliferation of AI have a lot of room for growth going forward, and it won’t be surprising to see their shares take off and go on a bull run.
In this article, we will take a look at two stocks that are capable of winning big in the AI revolution.
1. ASML Holding
Semiconductor companies will play a central role in adopting AI as advanced chips are needed to train large language models and also for running inferences on the trained models. For instance, OpenAI’s popular chatbot, ChatGPT, was reportedly trained using more than 30,000 graphics processing units from Nvidia.
The reason why GPUs are being deployed for training AI models is because of their ability to carry out a huge number of calculations simultaneously. As a result, the need for AI-specific chips such as GPUs is expected to grow at 30% a year through 2032, with the market generating an annual revenue of $227 billion after a decade.
ASML Holding‘s (ASML -2.11%) lithography machines help the likes of Nvidia manufacture advanced chips such as GPUs. In fact, ASML is the only supplier of EUV (extreme ultraviolet lithography) machines, which allow chipmakers to make advanced chips based on small manufacturing nodes that could deliver the required processing power and power efficiency to train AI models.
The AI race and the need for advanced chips explain why the global EUV lithography market is expected to grow at an annual pace of 27% to 29% through 2026. Not surprisingly, ASML has seen a solid surge in demand for its machines. It had an order backlog of almost 39 billion euros at the end of the first quarter of 2023, which is more than sufficient to help the company achieve its 2023 revenue growth target of 25% to 26 billion euros.
What’s more, the impressive backlog suggests that ASML could sustain outstanding growth levels for a long time. Analysts are anticipating ASML to deliver $29.4 billion in revenue this year, a figure that’s expected to move higher at a nice pace over the next couple of years.
Additionally, analysts are anticipating the Dutch semiconductor bellwether’s earnings to increase by nearly 26% annually over the next five years. However, don’t be surprised to see ASML clock faster growth than analysts expect, as the AI chip race could lead to a sharp jump in orders for its machines.
ASML is currently trading at 39 times trailing earnings, which is lower than its five-year average price-to-earnings ratio of 41. Moreover, the company’s earnings multiple is on the lower side when compared to other AI stocks, which suggests that investors are getting a good deal on ASML now. That’s why now would be a good time to buy ASML stock hand over fist before it soars higher, following 38% gains so far in 2023.
2. Tesla
Tesla (TSLA 0.71%) stock has been on fire in 2023, with gains of nearly 130% as of this writing. You may wonder why Tesla finds a place in this article as the company is an electric vehicle (EV) manufacturer, but a closer look at its operations will make it clear that it relies on AI to make its cars better.
With almost 2 million Tesla cars on roads across the world, the company has access to massive amounts of real-world driving data, which it reportedly uses to train its AI models and make its cars smarter. The company’s full self-driving (FSD) system relies on eight cameras that are present on Tesla cars to recreate a three-dimensional (3D) view of objects, vehicles, traffic lights, lanes, roads, and other things that could help the car make a decision when it is driving itself.
More importantly, the company’s huge network of cars around the globe means that it could continuously improve its AI model by feeding it new data. And now, Tesla is looking to give its AI infrastructure a shot in the arm by deploying a supercomputer known as Dojo. This supercomputer has been built from scratch by the company to train machine learning models, especially using the video data coming in from its vehicles around the world.
Dojo is expected to go under production this month. Tesla says that it will continue to improve its capability by adding more graphics processing units (GPUs) from Nvidia to enhance its computing capability over the next year. More specifically, Tesla aims to deploy 300,000 of Nvidia’s A100 data center GPUs by October next year. That’s a huge number considering that OpenAI deployed roughly 10,000 Nvidia GPUs to train ChatGPT, which goes to show the scale of Tesla’s effort to shore up its AI infrastructure.
McKinsey estimates that the autonomous driving market could generate $300 billion to $400 billion in revenue by 2035. So, Tesla is doing the right thing by shoring up its AI capabilities, as doing so could help it tap a lucrative market and power its long-term growth. The good part is that Tesla is already delivering impressive growth, and AI is likely to act as an additional catalyst.
However, investors will have to pay a premium to benefit from a potential AI-driven upside in Tesla stock. The company is trading at 11 times sales following its tremendous rally this year. But the sales multiple is in line with Tesla’s five-year average price-to-sales ratio, and it could go higher as the company’s growth accelerates in the long run. That’s why investors looking for a growth stock that could take advantage of AI should consider acting before it is too late.
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