We recently compiled a list of the 35 Chip Stocks Powering AI Boom. In this article, we are going to take a look at where Applied Materials, Inc. (NASDAQ:AMAT) stands against the other AI stocks.
AI has played a pivotal role in driving growth within the semiconductor market, transforming it into one of the most lucrative sectors globally. As AI applications proliferate across industries — from cloud computing and autonomous vehicles to healthcare — demand for advanced semiconductor technologies has surged. NVIDIA, a leader in AI GPUs, reported record revenues exceeding $30 billion in Q2 2024, largely driven by AI-related chip sales. Jensen Huang, the CEO of the chipmaker, remarked that AI was the most powerful technology force of the time and was transforming industries across the board.
AI demands massive data processing capabilities, which in turn requires highly specialized semiconductors like GPUs, TPUs, and AI accelerators. Experts highlight that 75% of AI workloads rely on advanced chips designed specifically for machine learning and deep learning tasks. Research firm Gartner predicts that 70% of all new AI applications by 2025 will require hardware accelerators, primarily in data centers and edge computing environments, underscoring the critical role of AI in the semiconductor ecosystem. As AI models become more complex, they require exponentially larger memory and storage solutions.
Read more about these developments by accessing 30 Most Important AI Stocks According to BlackRock and AI News You Should Not Have Missed.
AI models like GPT-4 by OpenAI and PaLM by Google have billions of parameters, and memory-intensive High Bandwidth Memory (HBM) chips are crucial for training and inference. This has led to a significant increase in the production of memory chips, with AI-related demand accounting for a large portion of the $500 billion semiconductor industry. AI-focused startups and established companies alike are benefiting from this growth. For instance, the AMD acquisition of Xilinx in 2022 was aimed at enhancing AI capabilities, resulting in a major competitive advantage in AI chips.
However, the rosy picture has been dented in recent weeks on the back of a major selloff in the tech sector and increased volatility in the semiconductor space. Robert Maire, the chief of Semiconductor Advisors, a prominent financial consulting firm, recently appeared on news platform CNBC to discuss the market volatility in the chip sector, highlighting factors like earnings not being enough to keep stocks at inflated values and the threat of possible Chinese oversupply in trailing edge semiconductors. Maire said that AI has been the only driver of growth in the semi market, leading to a situation where investors got ahead of themselves.
Maire highlighted during his appearance that China was still lagging behind the US and Europe in the leading-edge AI space, as it had been deprived of tools needed to keep pace with change in this market. However, the chip advisor claimed that Chinese firms have caught up in the trailing edge AI space, citing examples of Chinese firms like Semiconductor Manufacturing International Corporation and Hua Hong Semiconductor Limited already exceeding US-based firms like UMC and GlobalFoundries in capability. He cautioned that despite progress, Chinese firms were still not doing enough to challenge US-based leaders in the trailing edge space.
Read more about these developments by accessing 33 Most Important AI Companies You Should Pay Attention To and 20 Industrial Stocks Already Riding the AI Wave.
Our Methodology
For this article, we selected companies that operate in the semiconductor sector and have exposure to the AI industry. 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).
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Applied Materials, Inc. (NASDAQ:AMAT)
Number of Hedge Fund Holders: 77
Applied Materials, Inc. (NASDAQ:AMAT) provides equipment, services, and software for the semiconductor industry. The company has emerged as a top AI play because of the strength of the DRAM and HBM businesses. DRAM represents around 25% of total semiconductor systems revenue. In the third fiscal quarter of this year, the company achieved 50% year-over-year growth in the DRAM business. This growth was impressive because it happened despite an 11% decline in China. The strength of the DRAM business of Applied Materials lies in investments in key advanced technologies that it has made over the past few years, including Gate-All-Around transistors and backside power delivery.
Applied Materials, Inc. (NASDAQ:AMAT) is a top chip firm on Wall Street. Stifel recently lowered the price target on the stock to $270 from $275 and kept a Buy rating, noting that the Q3 results and outlook of the chipmaker modestly exceeded consensus estimates, reflecting gradual growth in system and service revenue, despite revenue to China being down 24% quarter over quarter, and with China exposure now more de-risked, the advisory underlined that Applied was well-positioned to grow at/above the industry in 2025.
Overall AMAT ranks 9th on our list of the 35 chip stocks powering the AI boom. While we acknowledge the potential of Applied Materials, Inc. (NASDAQ:AMAT) 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 Applied Materials, Inc. (NASDAQ:AMAT) but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
