In this article, we discuss the 20 industrial stocks already riding the AI wave.
When investors think of artificial intelligence (AI), they usually relate the thought to prominent hardware and software companies working in the technology sector. However, a much wider understanding of AI is needed in order to pick out the best stocks that are likely to ride the AI wave as it evolves over time. Contrary to public opinion, one of the smartest ways of jumping on the AI bandwagon is by playing the industrial sector. Since the start of 2023, the beginning of the AI boom in other words, industrial stocks have jumped close to 30% in value. Of these, the firms that are directly exposed to AI verticals have more than doubled in value. According to a Goldman Sachs study on the matter, in the fourth quarter of 2023, over 30% of industrial firms mentioned AI in their earnings reports, up from just 10% in the same period the preceding year.
In addition to the obvious picks in the semiconductor space, investors should turn their attention towards industrial firms that provide construction, engineering, electronics, cooling, and connectivity services. Even though these firms derive only a portion of their revenue from AI at the present, the explosive growth potential of AI can be a meaningful driver of their revenues in the coming months. Indeed, some indications of this can be gleaned from the fact that industrial firms linked to AI grew their revenues by almost 15% last year. This number is comfortably above their non-AI peers and the S&P 500 average for 2023. Industrial firms help manage the computational powers of AI data centers, make high speed connections possible, and also make sure they operate at optimal temperatures.
Lazar Naiker, an analyst at capital markets firm AGF Investments, explains how traditional data centers are different from AI ones. Essentially, AI data centers are powered by graphic processing units (GPUs), while their traditional counterparts are powered by central processing units (CPUs). GPUs operate at a faster speed and thus need higher bandwidth cables for communication with other GPUs. There is a 10 to 1 difference in the number of cables needed to power GPUs and CPUs. AI applications require constant communication between data center GPUs as well, the development of neural networks, so to speak, whereas this is not the case for CPUs. Another key difference is power consumption. Per Naiker, the GPU uses almost 5 times the power required by a CPU.
Our Methodology
For this article, we selected industrial stocks that posted more than 25% gains in 2024. From this list, we selected firms that have links to the AI universe and approximated percentage revenues based on these links. These stocks are also popular among hedge funds. 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).
Industrial Stocks Already Riding the AI Wave
20. Crane Company (NYSE:CR)
Number of Hedge Fund Holders: 35
YTD Return as of August 1: 37%
Approximate Percentage Revenue from AI: 2%
Crane Company (NYSE:CR) manufactures and sells engineered industrial products. The firm is a market leader in providing electronics and power conversion solutions to the aerospace and defense markets. These markets are making use of AI to transform their businesses. The company also markets fiberglass-reinforced plastic panels. These panels are being used in AI data centers as they reduce the overall weight and streamline the design for such use cases. The flurry of business activity as a result of the AI boom has helped the company beat market expectations on earnings per share and revenue for the second quarter of 2024 by $0.08 and $21 million respectively.
Max Mitchell, the CEO of Crane Company (NYSE:CR), remarked during the second quarter earnings call that strength in electronics and process flow technologies had helped the company post a 9% core sales growth in the quarter, stressing that the firm had a direct line of sight to delivering on 18% earnings growth.
19. EMCOR Group, Inc. (NYSE:EME)
Number of Hedge Fund Holders: 41
YTD Return as of August 1: 76%
Approximate Percentage Revenue from AI: 4%
EMCOR Group, Inc. (NYSE:EME) provides construction and facilities, building, and industrial services. Although the company has benefited from the AI data center boom this year, it already had a solid growth trajectory due to deep links with the hyperscale data center customers, domestic semiconductor firms, and clean energy component manufacturers. In the first quarter of this year, the domestic electrical and mechanical construction segment of the firm generated combined sales of over $2 billion, up 27% from a year ago. These contributed to total revenue of $3.4 billion and earnings per share were $4.17, surpassing estimates by a whopping 47%.
Tony Guzzi, the CEO of EMCOR Group, Inc. (NYSE:EME), said during the first quarter earnings call that the company was executing well with strong demand across many of the market sectors, including high-tech and traditional manufacturing, as well as network and communications, which included data center work.
In its Q1 2024 investor letter, TimesSquare Capital Management, an asset management firm, highlighted a few stocks and EMCOR Group, Inc. (NYSE:EME) was one of them. Here is what the fund said:
“Many of our Industrial positions provide necessary business-to-business operational services, highly technical components, automation & efficiency improvements, or essential infrastructure services. EMCOR Group, Inc. (NYSE:EME) supplies electrical, mechanical, and facilities services. The company’s strong results fueled a 62% increase in the stock price. Highlights from the quarter included improved margins and a record level of backlog. We trimmed the position on this strength.”
18. SPX Technologies, Inc. (NYSE:SPXC)
Number of Hedge Fund Holders: 19
YTD Return as of August 1: 48%
Approximate Percentage Revenue from AI: 5%
SPX Technologies, Inc. (NYSE:SPXC) supplies infrastructure equipment serving the heating, ventilation, cooling, detection and measurement markets worldwide. The cooling products and engineered air movement solutions for the HVAC industrial and power generation marketed by the firm are directly linked to the construction and powering of AI data centers across the United States. The market-leading position of the firm in the cooling market enabled it to beat market expectations on earnings per share and revenue by $0.17 and over $10 million respectively in the second quarter of 2024.
Gene Lowe, the CEO of SPX Technologies, Inc. (NYSE:SPXC), commented during the second quarter earnings call that the firm was exceeding expectations on key profit measures amid robust demand for cooling products. He noted in particular the performance of OlympusV, a cooling product that balances power usage with water cooling.
In its Q3 2023 investor letter, Artisan Partners, an asset management firm, highlighted a few stocks and SPX Technologies, Inc. (NYSE:SPXC) was one of them. Here is what the fund said:
“SPX Technologies, Inc. (NYSE:SPXC) is a specialty manufacturer of commercial and industrial HVAC equipment as well as specialty detection instruments. Over the years, the company has successfully transformed into a simpler and cohesive company by divesting lower margin, cyclical businesses and acquiring higher growth, higher margin businesses. The company is now able to capitalize on several secular tailwinds, including a global regulatory push to improve energy efficiency, the reshoring of manufacturing and a large pipeline of US infrastructure upgrades. In addition, we believe the company’s multiple, highly cash-generative business units should fuel a continued bolt-on acquisition strategy. The company reported financial results that beat expectations, and management increased guidance, citing benefits from ~50% of its business that is exposed to secular tailwinds. Given the thesis-affirming results, we added to the position.”
17. Garmin Ltd. (NYSE:GRMN)
Number of Hedge Fund Holders: 24
YTD Return as of August 1: 35%
Approximate Percentage Revenue from AI: 7%
Garmin Ltd. (NYSE:GRMN) designs, develops, manufactures, markets, and distributes a range of wireless devices worldwide. These devices gather a lot of data that can be used to track fitness, activities, workouts, and wellness. This data is then used by the software offered by the firm to suggest further workouts and activities based on AI models. The company is also partnering with generative AI algorithm innovator NeuroBrave to develop advanced solutions to treat and improve mental wellness, neural disorders, chronic stress, anxiety, and different types of addictions.
Clifton Pemble, the CEO of Garmin Ltd. (NYSE:GRMN), said during the second quarter earnings call that his company viewed AI as a potential tool. He said that his company was interested in customer data and trend tools powered by AI in a more constrained model. He added that his company was taking a wait-and-see approach towards AI.
In its Q4 2023 investor letter, Diamond Hill Capital, an asset management firm, highlighted a few stocks and Garmin Ltd. (NYSE:GRMN) was one of them. Here is what the fund said:
“Other bottom contributors included our short positions in Garmin Ltd. (NYSE:GRMN) and International Business Machines (IBM), as well as our long position in Chevron. Outdoor fitness and adventure equipment maker Garmin benefited from strong growth in its fitness and auto original equipment manufacturer segments. Over the long term, we believe the company’s high-end wearables products will face significant competition from competitors like Apple and Samsung.”
16. MasTec, Inc. (NYSE:MTZ)
Number of Hedge Fund Holders: 42
YTD Return as of August 1: 48%
Approximate Percentage Revenue from AI: 8%
MasTec, Inc. (NYSE:MTZ) is an infrastructure construction company that provides engineering, building, installation, maintenance, and upgrade services for communications, energy, utility, and other infrastructure. The company is one of the largest construction firms in the US and has the geographic reach, scalability, and financial stability to be one of the biggest beneficiaries of the data center boom in the AI space. The firm also provides design, construction, and maintenance services for wireless networks. As more AI products penetrate households, high speed connectivity is going to be a key for realizing the true potential of these products. A lot of investment is thus geared towards improving wireless connection speeds across the US, with MasTec being one of the primary beneficiaries.
Jose Mas, the CEO of MasTec, Inc. (NYSE:MTZ), underlined during the second quarter earnings call that the communications and pipeline segment of the firm continued to deliver solid margins despite pressures in the power delivery segment. He said the diversification efforts of the firm in the energy domain were serving to offset power delivery worries. He noted that despite short term pressures, the long-term power market predictions bode well for the future of his firm.
In its Q1 2024 investor letter, First Pacific Advisors, an asset management firm, highlighted a few stocks and MasTec, Inc. (NYSE:MTZ) was one of them. Here is what the fund said:
“MasTec, Inc. (NYSE:MTZ) is a contractor that builds and repairs infrastructure for telecoms, electric utilities, oil and gas pipelines and the clean energy industry. The company benefits from strong spending for 5G in telecom and government support (including the Infrastructure Investment and Jobs Act) for clean energy and the electrical grid.10 The Mas brothers have an impressive history of rolling up smaller players and growing earnings, most recently in the electrical and clean energy spaces. But we became uncomfortable with the low margins and competition in the electrical utility and clean energy businesses. On Aug 4, 2023, in its Q2 2023 earnings release, the company reduced guidance, and we began to exit our position, partially in Q3 2023 and fully by the end of Q4 2023.”
15. Entegris, Inc. (NASDAQ:ENTG)
Number of Hedge Fund Holders: 42
YTD Return as of August 1: 27%
Approximate Percentage Revenue from AI: 9%
Entegris, Inc. (NASDAQ:ENTG) develops, manufactures, and supplies microcontamination control products, specialty chemicals, and advanced materials handling solutions. The firm markets specially mixed liquids and gasses that are used in semiconductor manufacturing facilities. These chips are then used by AI hardware and software firms. The company was recently awarded a $75 million grant under the CHIPS Act by US President Biden to fund the development of a facility in Colorado that would support the production of liquid filter membranes and Front Opening Unified Pods (FOUPS). The latter are specialized containers invented by Entegris to secure semiconductor wafers when transported during the manufacturing process. Top chip companies like Intel, TSMC, Micron, and GlobalFoundries are FOUP customers.
Bertrand Loy, the CEO of Entegris, Inc. (NASDAQ:ENTG), said during the second quarter earnings call that the company was the first materials supplier to be awarded funding through the CHIPS Act, validating the importance of the position of the firm in the chip market. He also noted that AI-driven growth was propelling markets forward in chips and memory.
In its Q4 2023 investor letter, The London Company, an asset management firm, highlighted a few stocks and Entegris, Inc. (NASDAQ:ENTG) was one of them. Here is what the fund said:
“Entegris, Inc. (NASDAQ:ENTG) – ENTG shares rallied during the quarter as visibility in the semiconductor market improved and demand for its value added product suite remains strong. ENTG is benefiting from the higher amount of materials needed for miniaturization and is winning business as its products deliver faster time to yield. Management has been delivering on its debt reduction strategy. We remain attracted to the industry’s high barriers to entry, limited competitors, and high switching costs.”
14. Intuitive Surgical, Inc. (NASDAQ:ISRG)
Number of Hedge Fund Holders: 79
YTD Return as of August 1: 34%
Approximate Percentage Revenue from AI: 12%
Intuitive Surgical, Inc. (NASDAQ:ISRG) develops, manufactures, and markets products that enable physicians and healthcare providers to enhance the quality of and access to minimally invasive care. In addition to the use of AI in robotics, the firm is also exploring the use of AI to develop a machine learning tool that will make use of real-time artificial intelligence to help predict risks related to surgical complications. The fifth generation of the da Vinci robot, the premier robotic surgery tools marketed by the firm, incorporates AI into the platform that will enable the overall package to evolve over time with software updates. It has 10,000x compute power compared to the previous iteration.
Gary Guthart, the CEO of Intuitive Surgical, Inc. (NASDAQ:ISRG), told investors last year that the firm was finally in a position to leverage years of work with research partners on AI by marketing technologies that make use of AI to help shorten surgeon training times, help hospitals improve surgical program efficiencies and ultimately reduce costs. One of these products, called Case Insights, was launched by the firm in late 2023.
In its Q1 2024 investor letter, Baron Funds, an asset management firm, highlighted a few stocks and Intuitive Surgical, Inc. (NASDAQ:ISRG) was one of them. Here is what the fund said:
“Intuitive Surgical, Inc. (NASDAQ:ISRG) sells the da Vinci surgical robotic system for minimally invasive surgical procedures. The stock rose after the company announced the planned launch of the da Vinci 5, its next-generation, multiport robotic system. The new system has 10,000 times the computing power of its predecessor and features over 150 design upgrades such as force feedback, improved visualization, and productivity enhancements. Intuitive plans to launch the device at a small number of customers in the U.S. before releasing it more broadly. We think the da Vinci 5 will enable Intuitive to continue to generate strong revenue and earnings growth and maintain its competitive edge.”
13. Eaton Corporation plc (NYSE:ETN)
Number of Hedge Fund Holders: 85
YTD Return as of August 1: 27%
Approximate Percentage Revenue from AI: 14%
Eaton Corporation plc (NYSE:ETN) operates as a power management company worldwide. The primary AI catalyst for the firm is sales of data center equipment. It makes and sells electrical components used in data centers across the globe. AI trends sweeping the market are already helping the firm increase order. The backlog for the electrical segment of the business has jumped to more than $11 billion, quadrupling from pre-COVID levels. The company also continues to impress investors with organic sales growth, margin expansion, and very strong free-cash-flow generation.
Craig Arnold, the CEO of Eaton Corporation plc (NYSE:ETN), said during the second quarter earnings call that the company expected that the major part of the growth in the AI data center was still ahead, noting that only 5 to 10% of the capital spending of large businesses was directed towards AI data centers in the present market. Arnold clarified, however, that the backlog of data center build, in excess of $140 billion, represented eight years of business that his company was well-positioned to take advantage of in the coming months and years.
In its Q1 2024 investor letter, Ave Maria, an asset management firm, highlighted a few stocks and Eaton Corporation plc (NYSE:ETN) was one of them. Here is what the fund said:
“Eaton Corporation plc (NYSE:ETN) is an intelligent power management company. The company is a long-term beneficiary in the trend towards electrification, energy transition and digitalization. Eaton is also benefiting from unprecedented global stimuli such as the Inflation Reduction Act, Infrastructure Investment and Jobs Act, the Chips and Science Act and the EU recovery plan known as the NextGenerationEU.”
12. Fluor Corporation (NYSE:FLR)
Number of Hedge Fund Holders: 28
YTD Return as of August 1: 27%
Approximate Percentage Revenue from AI: 17%
Fluor Corporation (NYSE:FLR) provides construction and engineering services. The company provides mission critical services to several departments in the government. Recently, it announced that it would be incorporating AI into all construction and engineering services. The firm hopes to deduce how engineering, procurement, fabrication and construction will perform over the next few months, and then measure in real time how they do through the use of AI tools. A senior executive of the firm said that the ability to read and interpret big data in real time would be crucial in making better decisions at every step in the construction and engineering businesses.
David Constable, the CEO of Fluor Corporation (NYSE:FLR), highlighted during the first quarter earnings call that his company was well positioned to benefit from the increase in data center construction as a result of the AI boom. He also noted that the CHIPS Act was jump starting semi production in the US, noting that this too would help the firm land business in the government and private sector in 2024 as well as 2025.
11. Corning Incorporated (NYSE:GLW)
Number of Hedge Fund Holders: 31
YTD Return as of August 1: 31%
Approximate Percentage Revenue from AI: 18%
Corning Incorporated (NYSE:GLW) engages in the display technologies, optical communications, environmental technologies, specialty materials, and life sciences businesses. The optic products offered by the firm have witnessed a surge in demand in the past few months as large companies invest in AI data centers. In addition to these connectivity products, the firm also provides the glass that is on top of popular smartphone brands. These smartphones are becoming AI powerhouses in themselves. The company grew the optical business by over 40% in the second quarter, compared to the same period last year, due to AI demand, even as the smartphone market remained soft.
Wendell Weeks, the CEO of Corning Incorporated (NYSE:GLW), detailed during the second quarter earnings call that the growth in revenue, sales, and earnings during the first half of 2024 was primarily driven by strong adoption of optical connectivity products due to soaring demand for generative AI. Weeks noted that new AI data centers needed about 10 times the fiber optic connections utilized by normal data centers, largely due to compute power of new GPUs and the need to connect the GPUs together. He said his firm had helped customers design the links needed for this kind of interconnectivity over the past few years.
In its Q2 2024 investor letter, O’keefe Stevens Advisory, an asset management firm, highlighted a few stocks and Corning Incorporated (NYSE:GLW) was one of them. Here is what the fund said:
“Corning Incorporated (NYSE:GLW), another long-time holding, announced Q2 results would come in better than anticipated due to outperformance in their optical connectivity products used for Generative AI. Corning has long been a disappointing investment; with leading-edge technology, it consistently underperforms expectations. Their “springboard” plan, which revolves around $3 billion of excess capacity, seems to be the first sign in a long time that they are ready for a surge in growth. Management has frequently discussed the potential for operating leverage in nearly every conference call, anticipating a return to normal business conditions. Margins should expand over the coming quarters, driving EPS growth. The $3B in incremental sales could be worth in excess of $900m in EBITDA.”
10. Cognex Corporation (NASDAQ:CGNX)
Number of Hedge Fund Holders: 32
YTD Return as of August 1: 23%
Approximate Percentage Revenue from AI: 20%
Cognex Corporation (NASDAQ:CGNX) provides machine vision products that capture and analyze visual information to automate manufacturing and distribution tasks worldwide. The company is at the forefront of AI incorporation into machine vision products. Earlier this year, the firm launched Insight L38, the first AI-enabled 3D industrial vision system in the world. The firm claims this product is already proving to be twice as popular with customers as the previous iteration of this offering. The firm also sells AI-backed modular tunnel vision and has incorporated AI into barcode readers for faster scanning.
Robert Willett, the CEO of Cognex Corporation (NASDAQ:CGNX), said during the second quarter earnings call that the company expected growth in semis as well as memory as AI made customers invest in chips and related offerings for growth in the latest tech domain. Willett noted that efforts to localize chip production bode well for the long term future of the company, which is also boosted by heavy investments in AI.
In its Q4 2023 investor letter, Conestoga Capital Advisors, an asset management firm, highlighted a few stocks and Cognex Corporation (NASDAQ:CGNX) was one of them. Here is what the fund said:
“Cognex Corporation (NASDAQ:CGNX): CGNX is a leading provider of machine vision solutions used in factories and warehouses to measure, inspect, and identify items to ensure accuracy. Revenue is largely dependent on customers’ capital spending, which remains challenged across most of its end markets, namely consumer electronics and logistics. One of our smaller portfolio holdings, we exited our position during the quarter to redeploy proceeds into several existing portfolio holdings. We continue to hold Cognex (CGNX) shares in our SMid Cap portfolio.”
9. Comfort Systems USA, Inc. (NYSE:FIX)
Number of Hedge Fund Holders: 34
YTD Return as of August 1: 64%
Approximate Percentage Revenue from AI: 22%
Comfort Systems USA, Inc. (NYSE:FIX) provides mechanical and electrical installation, renovation, maintenance, repair, and replacement services. The company designs and installs HVAC and electrical systems for data centers. These data centers are used by AI firms. These systems are also used by chip fabrication firms. The firm has the advantage of being the largest mechanical contracting firm in North America. It has 45 operating companies in 170 locations across the continent. This brand value enables the firm to build on an already existing network of mechanical and electrical work for hyperscale customers in the past.
Brian Lane, the CEO of Comfort Systems USA, Inc. (NYSE:FIX), remarked during the second quarter earnings call that people were forgetting that streaming giants had started the data center trend and compute power, required for AI decision-making, could be added onto existing data center builds. He noted that AI was an incremental addition to a very,very solid pipeline for the firm already.
In its Q1 2024 investor letter, Third Avenue Management, an asset management firm, highlighted a few stocks and Comfort Systems USA, Inc. (NYSE:FIX) was one of them. Here is what the fund said:
“We sold our positions in Sphere Entertainment and Comfort Systems USA, Inc. (NYSE:FIX). The two closed positions highlight the nuances between managing the portfolio’s Long-Term Compounder investments (“LTC”) versus Time Arbitrage/Special Situation (“TA/SS”) positions (see Portfolio Strategy section below for more on these investment types).
While Sphere exemplifies a TA/SS investment, Comfort Systems was an ideal LTC position. We affectionately labeled Comfort Systems a “thin file” investment, meaning there was little drama attached to the thesis, and Comfort Systems quietly compounded book value over time. It is a low-margin business, yet it generates cash flows, and its management prudently allocates capital. Comfort Systems was owned by the Fund for over seven years and compounded shareholder return at a prodigious 37% annual rate over the ownership period. Comfort’s end markets, management team, culture, and compensation systems checked our boxes. We sold the position as Comfort Systems grew its market capitalization to $9 billion. Thus, it was no longer a small cap. It was an exceptional investment for Fund shareholders. We wish the company continued success and are grateful for their efforts.”
8. nVent Electric plc (NYSE:NVT)
Number of Hedge Fund Holders: 61
YTD Return as of August 1: 24%
Approximate Percentage Revenue from AI: 22%
nVent Electric plc (NYSE:NVT) designs, manufactures, markets, installs, and services electrical connection and protection solutions. The firm is emerging as an important player in the AI space as it offers cooling solutions for data centers. Since AI firms rely on fast data processing, the chips they use to process the data often get hot. Traditional air cooling methods are not always the best solution for firms who are increasingly looking towards building smaller but more capable data centers. The liquid cooling solutions offered by the company save energy, enable firms to put more machines in a smaller space, and have better overall value since they come without hefty maintenance charges typical of air cooling systems.
Beth Wozniak, the CEO of nVent Electric plc (NYSE:NVT), noted during the first quarter earnings call that the company was witnessing an acceleration in demand for data solution products, a change she attributed to the AI trend sweeping the markets across the globe. Wozniak highlighted the liquid cooling solutions offered by the firm in particular during the call, describing the growth trends due to AI as strong.
In its Q1 2024 investor letter, Artisan Partners, an asset management firm, highlighted a few stocks and nVent Electric plc (NYSE:NVT) was one of them. Here is what the fund said:
“Our top contributors were NVent Electric plc (NYSE:NVT), Corebridge Financial and Lamar Advertising. nVent Electric provides electrical connections and protection solutions. These are mission-critical elements in commercial electrical and mechanical systems and civil infrastructure. nVent has shown consistent and steady growth since the pandemic, having reported 12 consecutive quarters of year-over-year sales growth supported by the secular tailwinds of electrification, sustainability and digitalization. Growth has come from a combination of volumes and pricing, with the company successfully offsetting inflation with pricing. Due to the low cost of its products relative to a project and high failure costs for customers, nVent has good pricing power and sustainable margins. In the recent quarter, the company’s data centers business (~14% of sales) was a standout, growing 20% year over year, as the acceleration in artificial intelligence infrastructure investments has created increased demand for the company’s liquid cooling solutions. Though nVent is no longer selling as cheaply as when it first drew our interest, the stock still sells at a lower P/E multiple than the S&P 500® Index despite better earnings growth.”
7. Motorola Solutions, Inc. (NYSE:MSI)
Number of Hedge Fund Holders: 43
YTD Return as of August 1: 28%
Approximate Percentage Revenue from AI: 23%
Motorola Solutions, Inc. (NYSE:MSI) provides public safety and enterprise security solutions. The company is aggressively advocating for the increased adoption of AI in large-scale safety and security systems. In May, Mahesh Saptharishi, the chief technology officer of the company, called for the integration of AI into emergency response systems, noting that AI would help reduce response times and save thousands of lives in the process. His company has invested $858 million in research and development in the past few months. These investments have focused on AI-based technologies and the expansion of a portfolio of intellectual property. This portfolio, which includes AI tools, stands at around 6,560 granted patents and almost 775 pending patents.
Jason Wrinkler, the CFO of Motorola Solutions, Inc. (NYSE:MSI), explained during the second quarter earnings call that the firm expected 12% of growth in video for the full fiscal year, enabled by new products that were using AI-enabled tools for video recording. These AI tools are available on both cloud and on-premise. Wrinkler called AI-backed video an exciting opportunity for the company in the coming months.
In its Q2 2024 investor letter, Wedgewood Partners, an asset management firm, highlighted a few stocks and Motorola Solutions, Inc. (NYSE:MSI) was one of them. Here is what the fund said:
“Motorola Solutions, Inc. (NYSE:MSI) was a contributor to performance as the Company continued its steady execution with +10% sales growth and +20% operating earnings growth. Motorola also continues to grow its backlog due to its competively advantaged core land mobile radio (LMR) business is a critical long-term solution for emergency services around the globe. The technology behind LMR is relatively simple compared to current 5G wireless standards, but it is an extremely robust implementation that must withstand regular and even mega catastrophes to guarantee uptime to the emergency services that depend on it for communications. Motorola has unmatched competitive positioning in this core business and should be able to continue to expand value-added service offerings to LMR and drive attractive long-term growth.”
6. Amphenol Corporation (NYSE:APH)
Number of Hedge Fund Holders: 51
YTD Return as of August 1: 32%
Approximate Percentage Revenue from AI: 24%
Amphenol Corporation (NYSE:APH) primarily designs, manufactures, and markets electrical, electronic, and fiber optic connectors. It has a range of product offerings for AI firms, including chipsets, networking products, and server and GPU solutions. The firm also markets high speed power connectors used in data centers that compute AI tasks for large software firms. The surging demand for AI products has enabled the company to record a more than 56% organic increase in datacom sales for the second quarter. The company also plans to expand capital investments in the coming months to keep pace with the quantity and quality of orders from AI-enabled customers.
Adam Norwitt, the CEO of Amphenol Corporation (NYSE:APH), commented during the second quarter earnings call that between March and June, bookings for the firm were particularly strong from IT datacom customers focused on artificial intelligence, even though traditional datacom orders also saw a nominal increase. Norwitt added that his firm expected to grow sales in the datacom segment during the third quarter as customers flocked towards the leading high-speed and power interconnect products manufactured by the company.
In its Q2 2024 investor letter, Aristotle Atlantic Partners, an asset management firm, highlighted a few stocks and Amphenol Corporation (NYSE:APH) was one of them. Here is what the fund said:
“Amphenol Corporation (NYSE:APH) is one of the world’s largest designers, manufacturers and marketers of electrical, electronic and fiber optic connectors and interconnect systems; antennas; sensors and sensor-based products; and coaxial and high-speed specialty cable. The company estimates, based on recent reports of industry analysts, that worldwide sales of interconnect and sensor-related products were approximately $235 billion in 2023. The company aligns its businesses into three reportable business segments: Harsh Environment Solutions, Communications Solutions, and Interconnect and Sensor Systems. The company sells products to customers in a diversified set of end markets.
We see Amphenol benefiting from increased spending by cloud service providers, hyperscalers and enterprises on new data center architectures that enable AI computing technologies. The increased interconnect content that AI-enabled data centers require, we believe, will underpin a double-digit sales growth outlook for the company over the next few years. The company has attractive end-market diversification, with exposure to both short-cycle and long-cycle, and no single end market vertical represents more than 25% of revenues. Additionally, Amphenol has strong free cash flow generation, which has supported a successful M&A strategy that has driven enhanced advancement.”
5. Flex Ltd. (NASDAQ:FLEX)
Number of Hedge Fund Holders: 44
YTD Return as of August 1: 44%
Approximate Percentage Revenue from AI: 27%
Flex Ltd. (NASDAQ:FLEX) provides manufacturing solutions to various brands in Asia, the Americas, and Europe. The company is targeting the AI sector with an impressive 80% coverage for data center needs of large and hyper scale customers. It is also one of the few AI industrial stocks that have global coverage and exposure to automotive verticals. The data center and power revenues for the firm comprise over 25% of the overall revenue. A key competitive advantage that the firm has over peers is that it markets power pods for data centers that have a lower build cost and shorter lead times. This allows Flex customers to scale at a faster pace than their peers.
In the first quarter earnings call, Revathi Advaithi, the CEO of Flex Ltd. (NASDAQ:FLEX), remarked that there was strong demand for cloud solutions in the CEC business of the firm as AI helped drive a transition in data center development and working. She also added that this was helping the demand for power products made by the company. Per the CEO, this combined portfolio, from networking to power, positioned the business well for the AI driven technology transition happening from grid to chip and from the cloud to the edge.
In its Q1 2024 investor letter, Artisan Partners, an asset management firm, highlighted a few stocks and Flex Ltd. (NASDAQ:FLEX) was one of them. Here is what the fund said:
“We initiated new GardenSM positions in Flex Ltd. (NASDAQ:FLEX), On Holding and Onto Innovation during the quarter. Flex provides outsourced electronic manufacturing services to a diverse set of end markets. The company hired a new CEO in 2020, who has been driving a strategic pivot toward manufacturing high-value products in areas such as health care, industrial, automotive and cloud infrastructure. Today, these higher value items account for ~60% of revenues, and we believe they will continue to tick higher. We also believe an improving business mix, along with the reshoring of supply chains, will lead to faster growth and higher margins.”
4. Celestica Inc. (NYSE:CLS)
Number of Hedge Fund Holders: 38
YTD Return as of August 1: 85%
Approximate Percentage Revenue from AI: 29%
Celestica Inc. (NYSE:CLS) offers a range of product manufacturing and related supply chain services. The firm has two primary business interests in the connectivity and cloud solutions (CGS) and advanced technology solutions (ATS) markets. The CGS segment comprises a healthier portion of the overall revenue than the ATS division. This mix was 55-45 in the second quarter. Within the CGS, the firm is playing the AI space through networking products like 400G and 800G switches, and growth in storage. It is also in the middle of technology transitions in sole-sourced programs that will help the firm expand business with the chip market.
In the second quarter earnings call, Rob Mionis, the CEO of Celestica Inc. (NYSE:CLS), noted that the top-line growth and margin expansion for the firm continued to be supported by large-scale investments in data center infrastructure from hyperscale customers. As a result, the firm saw a 51% year-to-year increase in CGS revenues in the second quarter and achieved a segment margin of 7.2%, which was 120 basis points higher compared to the prior-year period.
3. Coherent Corp. (NYSE:COHR)
Number of Hedge Fund Holders: 50
YTD Return as of August 1: 65%
Approximate Percentage Revenue from AI: 34%
Coherent Corp. (NYSE:COHR) develops, manufactures, and markets engineered materials, optoelectronic components, and devices worldwide. The firm has an impressive track record in the optoelectronic market, being a major player in the arena for more than two decades and leading industry revolutions from telecom networks to enterprise data centers to web hyperscalers. It is no surprise that the firm is now a key player in the AI evolution. One of the most important AI products of the firm are 800G transceivers which read and write data at a speed of 800 gigabytes per second, crucial for prompt processing of AI tasks.
In the third quarter earnings call, Chuck Mattera, the CEO of Coherent Corp. (NYSE:COHR), highlighted how the demand for 800G transceivers had led to a 50% sequential increase in non-GAAP earnings per share. He added that the firm expected AI tailwinds to continue to bolster earnings in the fourth quarter and into 2025. AI was mentioned more than ten times in the earrings call of the company, underscoring the importance of the new tech in the present and future business plans.
In its Q2 2024 investor letter, Diamond Hill Capital, an asset management firm, highlighted a few stocks and Coherent Corp. (NYSE:COHR) was one of them. Here is what the fund said:
“Other top individual contributors in the quarter included Coherent Corp. (NYSE:COHR) and new holding International Paper Company. Coherent is a global leader in materials, networking and lasers for the industrial, communications, electronics and instrumentation markets. The company is benefiting from rapid growth in AI-related transceiver sales. Investors were also seemingly encouraged by Jim Anderson’s hire as the new CEO. Anderson came from Lattice Semiconductor, where he had an excellent track record.”
2. Fabrinet (NYSE:FN)
Number of Hedge Fund Holders: 33
YTD Return as of August 1: 16%
Approximate Percentage Revenue from AI: 37%
Fabrinet (NYSE:FN) provides optical packaging and precision optical, electro-mechanical, and electronic manufacturing services. The company makes fiber-optic cables that are used to power telecommunications, AI data centers, and even the Internet across the world. Even though demand for telecom remains relatively soft, the AI buzz has served to offset these concerns. The datacom business of the company, which revolves around cable provision for AI data centers, has grown rapidly in the past two years. Starting from just $88 million per quarter in 2022, the firm recently revealed that datacom revenue had jumped to more than $305 million.
In the third quarter earnings call, Seamus Grady, the CEO of Fabrinet (NYSE:FN), underlined how this 150% jump in datacom revenue had benefited from the rise in demand for 800 gigs technology for AI applications. NVIDIA, one of the biggest winners of the AI craze, is the flagship customer for Fabrinet. The latter powers the data centers of the former with optical cables and electro-mechanical manufacturing services.
In its Q1 2024 investor letter, First Pacific Advisors, an asset management firm, highlighted a few stocks and Fabrinet (NYSE:FN) was one of them. Here is what the fund said:
“Fabrinet (NYSE:FN) is a contract manufacturer of components and modules. The company has a dominant position in hard-to-replicate precision-manufacturing technologies and an enviable track record of execution. The majority of Fabrinet’s sales are to networking equipment manufacturers but it has been successfully diversifying into the data center, industrial, auto, and medical end-markets. FN’s stock jumped after reporting June 2023 earnings – datacenter sales increased 50% sequentially and more than 100% over the previous year, driven by their 800-gigabyte transceivers for Artificial Intelligence applications. The company also announced that Nvidia is a 10%+ customer.
Fabrinet was a top-five holding in the Fund before its June 2023 earnings announcement. Since then, the stock has appreciated considerably and we have trimmed in keeping with our risk management policies. Given the growth in its forward earnings estimates, Fabrinet trades in line with its historical earnings multiples and remains a top five position for us.”
1. Teradyne, Inc. (NASDAQ:TER)
Number of Hedge Fund Holders: 34
YTD Return as of August 1: 25%
Approximate Percentage Revenue from AI: 40%
Teradyne, Inc. (NASDAQ:TER) designs, develops, manufactures, and sells automated test systems and robotics products worldwide. In the past few months, investments in advanced semiconductor manufacturing and fabrication have more than tripled, topping $100 billion as manufacturers race to meet the increase in demand for complex chips that are used to run demanding applications for AI products. This has subsequently led to an increase in demand for automated test equipment (ATE), a specialty of Teradyne. ATEs are critical since they bring up AI devices quickly, optimize their yield, and improve silicon performance.
In the second quarter earnings call, Greg Smith, the CEO of Teradyne, Inc. (NASDAQ:TER), explained how Cloud AI products were driving strong demand for ATEs across chip and memory markets. In the first half of 2024, the company was able to exceed the revenue it had made from chipmakers in all of 2023. It also grew the memory business by 30% in the first six months of the year, compared to 2023. Smith, however, cautioned that even though the chip and memory markets remained strong, a meaningful uptick in legacy auto and industrial markets might not occur until 2025.
In its Q4 2023 investor letter, TimesSquare Capital Management, an asset management firm, highlighted a few stocks and Teradyne, Inc. (NASDAQ:TER) was one of them. Here is what the fund said:
“New to the portfolio was Teradyne, Inc. (NASDAQ:TER), which produces testing and measurement equipment for semiconductors and other complex electronic systems. Already a holding in our Mid Cap Growth Strategy, after providing lower-than-expected guidance for the final quarter of its fiscal year Teradyne’s price fell, and its market cap entered the buy range for this strategy. We believed that its chip testing volumes reached a low point and were poised to recover. Since we started buying, Teradyne’s shares rallied 30% for the remainder of the quarter.”
While we acknowledge the potential of Teradyne, Inc. (NASDAQ:TER) as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than NVIDIA Corporation but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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