In this article, we will take a detailed look at the 10 Best Stocks to Buy Based on New AI ETF KraneShares Artificial Intelligence and Technology ETF (AGIX).
Over the past few months the market has seen a massive influx of AI-related ETFs as investors look to ride the bandwagon of AI investing. A report from Wall Street Journal in June said that all ten AI ETFs tracked by website ETF.com saw inflows this year. One major AI ETF, launched by Roundhill, saw its assets grow to $35 million from under $1 million in just two weeks.
Amid the craze of AI ETFs, does it make sense to start investing in every new ETF? Analysts offer some guidance. A Wall Street Journal report quoted Morningstar analyst Kenneth Lamont, who said that we should look for “thematic purity” while investing in AI ETFs. The ETF you choose, according to the analyst, must be investing in “bellwether” stocks positioned to benefit from the AI industry trends.
There is a new AI ETF in town. KraneShares Artificial Intelligence and Technology ETF (AGIX), launched earlier this month, tracks the Solactive Etna Artificial General Intelligence Index, which captures the performance of AI tech companies. The index seeks exposure to three main AI categories: hardware, infrastructure, and applications. The index picks companies by assigning AI Exposure Score, which assesses each company’s relevance to AI tech. You can get exposure to AI companies focusing on data centers, LLMs, AI tech to reduce costs and improve customer experience.
In this article, we will discuss the top 10 holdings of this new AI ETF and see whether they have the potential to rise in the coming months and weeks. With each stock, we have mentioned the number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
10. Arista Networks Inc (NYSE:ANET)
Number of Hedge Fund Investors: 69
Cloud-based networking solutions company Arista Networks Inc (NYSE:ANET) is also among the top ten holdings of the AGIX AI ETF.
Last month, Citi analyst Atif Malik increased his price target on the stock to $385 from $330. The analyst thinks while InfiniBand (a computer networking standard where NVDA has an edge) can take a major chunk of the AI networking market, Ethernet (Arista’s strength) is clearly gaining share. The analyst also said the AI back-end switching total addressable market could reach $15 billion by 2027, up from $10 billion. Based on these catalysts, the analyst increased his earnings estimates for Arista Networks for 2024, 2025 and 2026 by 4%, 16% and 13%, respectively.
What makes Arista a promising AI stock?
Arista Networks Inc (NYSE:ANET) is set to gain amid the AI-driven shift to high-speed networks due to its open Ethernet design and unified Arista EOS. The company’s partnership with Broadcom also created an opportunity for Arista Networks Inc (NYSE:ANET) to expand its integrated software and hardware solutions.
Arista Networks Inc (NYSE:ANET) claims its Ethernet architecture based on merchant silicon allows fast deployment for major hyperscalers and Tier-2 cloud providers.
During Q1 earnings call, Arista Networks Inc (NYSE:ANET) management said it targets $750 million in AI revenue by 2025.
Ethernet at scale is becoming the de facto network and premier choice for scale-out AI training workloads. A good AI network needs a good data strategy delivered by a highly differentiated EOS and network data lake architecture. We are therefore becoming increasingly constructive about achieving our AI target of 750 million in 2025. In summary, as we continue to set the direction of Arista 2.0 networking, our visibility to new AI and cloud projects is improving, and our enterprise and provider activity continues to progress well.
Read the full earnings call transcript here.
Despite Nvidia’s integrated Ethernet approach with Spectrum-X, Arista Networks Inc (NYSE:ANET) is confident about its scalable AI solutions using Jericho-based platforms, which could drive broader market adoption. Arista Networks Inc (NYSE:ANET) EOS offers a unified interface for various network applications, making it a reliable choice for cloud providers.
Arista Networks Inc (NYSE:ANET) does not see Nvidia as a direct competitor in the Ethernet space yet and playing on its strengths instead of competing against a giant gives it a strong position in the market.
Artisan Mid Cap Fund stated the following regarding Arista Networks, Inc. (NYSE:ANET) in its Q2 2024 investor letter:
“Notable trims in the quarter included Chipotle and Arista Networks, Inc. (NYSE:ANET). Arista Networks is the market leader in cloud networking equipment used in data centers. Shares have experienced strong outperformance since the beginning of 2023 due to its ethernet options being well positioned to capture market share in AI cloud environments (more scalable and cheaper than InfiniBand, an out-of-the-box solution by Nvidia). Similar to Chipotle, after a period of strong performance, we trimmed the position based on valuation and market cap.”
9. Tesla Inc (NASDAQ:TSLA)
Number of Hedge Fund Investors: 74
Tesla Inc (NASDAQ:TSLA) accounts for about 2.61% of the KraneShares Artificial Intelligence and Technology ETF (AGIX).
Tesla shares recently plunged after the company postponed its much-awaited robo taxi event until October. However, Tesla bulls say their core thesis remains unchanged.
Cathie Wood recently set a $2600 price target on Tesla Inc (NASDAQ:TSLA) for 2029, which presents a whopping 1300% upside potential from the current levels. Wood thinks the robo taxi project has the potential to deliver $8 to $10 trillion in revenue by 2030.
However, many believe Tesla Inc (NASDAQ:TSLA) won’t be able to live up to the hype around its robo taxi plans. Each robo taxi is expected to have a price target of around $150K to $200K, with some estimates suggesting Tesla Inc (NASDAQ:TSLA) would need about $35 billion to develop a global feet of such cars. Amid inflation and lack of preference for electric cars, American families will probably stay away from spending a fortune on robo taxis, which could cause a blow to Tesla Inc’s (NASDAQ:TSLA) plans in the future.
Alger Focus Equity Fund stated the following regarding Tesla, Inc. (NASDAQ:TSLA) in its Q1 2024 investor letter:
“Tesla, Inc. (NASDAQ:TSLA) is an electric vehicle manufacturer with a technological lead in its large and rapidly growing addressable market. In our view, Tesla is a transportation company that is setting the pace for industry innovation. During the quarter, shares detracted from performance after the company reported fiscal fourth quarter results, where revenues and earnings missed analysts’ estimates. Weaker-than-expected automotive revenues were partly driven by a reduced average selling price, which was down 15% year-over-year. Moreover, management decided to forgo providing volume guidance, though they did acknowledge they are in a lower growth phase given the uncertain consumer environment particularly as it relates to high ticket purchases.”
8. ASML Holding NV (AMS:ASML)
Number of Hedge Fund Investors: 75
ASML Holding NV (AMS:ASML) is the ninth-biggest holding of the KraneShares Artificial Intelligence and Technology ETF (AGIX).
ASML Holding NV (AMS:ASML) shares are down amid the company’s guidance that is based on fears of an expansion of restrictions by the US government on semiconductor exports to China. Management’s guidance for the third quarter fell short of expectations, predicting 7-17% quarter-on-quarter growth to €6.7B-€7.3B, below the consensus estimate of €7.67B.
However, some analysts believe geopolitical fears are priced in ASML Holding NV (AMS:ASML) and the stock has secular growth catalysts amid the rise in semiconductor demand following the AI boom. More specifically, ASML bulls believe the company’s Extreme ultraviolet (EUV) lithography has bright days ahead. The demand for EUV lithography tools is expected to skyrocket by 2025 and beyond driven by the need for advanced tools in DRAM and foundry/logic markets. The EUV tech is necessary for the manufacturing of developing advanced process nodes.
ASML Holding NV (AMS:ASML) remains a key beneficiary of this demand. A Jefferies report cited the company’s CFO who said that improved orders from TSMC (TSM) will drive the company’s 2025 outlook.
ASML Holding NV (AMS:ASML) has a near monopoly in the semiconductor industry as its machines are used by chip manufacturers to make physical chips.
ASML Holding NV (NASDAQ:ASML) supplies ultraviolet lithography photolithography machines used to manufacture advanced 3nm and 5nm chips. Jim Kelleher of Argus has set a $1,000 price target on the stock.
ASML Holding NV (AMS:ASML) was one of the stocks pitched during the SOHN Conference this year. Vijay Shilpiekandula of Dilation Capital, who was named the Sohn Idea Contest Winner, presented ASML as his best stock idea.
“What I find like good opportunity for investors in the market to think about right now is to be creative about the long-term capacities and the long-term earnings potential of this company based on this gold rush that all these memory makers and large language models are chasing,” Shilpiekandula said
Polen International Growth Strategy stated the following regarding ASML Holding N.V. (NASDAQ:ASML) in its fourth quarter 2023 investor letter:
“Netherlands-based ASML Holding N.V. (NASDAQ:ASML) and Japan-based Lasertec play dominant roles within different segments of the global semiconductor industry. In both cases, shares rallied significantly in the fourth quarter of 2023, prompting our positions to grow as a percentage of the overall portfolio. We believe both companies will see demand for their products as extreme ultraviolet (EUV) lithography and soon high-numerical aperture lithography must be utilized to manufacture the world’s smallest chips. However, in our estimation, 2024 could deliver a year of less exciting growth for the semiconductor industry, which prompted us to trim these positions back.”
7. Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM)
Number of Hedge Fund Investors: 135
Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) accounts for about 4.3% of the net assets of KraneShares Artificial Intelligence and Technology ETF (AGIX).
Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) is one of the top AI semiconductor stocks big tech funds are piling into, and for the right reasons. Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) is the biggest foundry that makes chips for fabless companies, enjoying an over 50% market share. Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) is behind some of the world’s most advanced chips, including 2nm and 3nm nodes. It supplies chips to major players like Apple (AAPL), Qualcomm (QCOM), and Nvidia (NVDA).
Despite these growth catalysts, analysts believe Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) valuation is depressed amid the Taiwan factor — any conflict between China and Taiwan would hamper Taiwan Semiconductor Mfg. Co. Ltd.’s (NYSE:TSM) business due to its huge reliance on international supply chains. The stock is trading at a forward P/E of 27, much lower than peers like ASML, NVDA and AMD. But some believe these concerns are overblown and there are no short-term risks to Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) from this perspective. Bank of America Brad Lin recently increased his earnings estimate and price target for the stock, saying TSMC is the “key beneficiary and enabler of AI prosperity.” Lin set a $180 price target on TSMC. Lin thinks Apple’s latest plans revealed at the WWDC event would bode well for Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) since TSMC makes 25% of its revenue from the Cupertino giant.
Wedgewood Partners stated the following regarding Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) in its Q2 2024 investor letter:
“Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) was a top contributor to performance during the quarter. The Company’s revenue growth continued to accelerate due to the rollout of its leading-edge N3 manufacturing node along with strong demand for chips used in artificial intelligence applications. Unlike in traditional CPUs, the Company has blue-chip customers, monopoly market share for manufacturing AI chips, such as GPUs. The Company’s aggressive investment in capital equipment several years ago should continue to pay off as fabless chip designers proliferate and require a manufacturing partner to shoulder capex risk. The Company’s continued aggressive investment and deployment in semiconductor manufacturing equipment is not an easily replicable competitive advantage.”
