Key Points
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Nvidia’s graphics processing units will likely continue to dominate the AI chip market.
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Manufacturing AI chips is not possible without ASML’s equipment.
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SK Hynix is the world’s leading maker of high-bandwidth memory, and its deal with Nvidia could solidify its dominance.
- 10 stocks we like better than Nvidia ›
Consulting firm McKinsey expects semiconductor spending to reach approximately $1.6 trillion by 2030 as a base case. That would be up from $775 billion in 2024, and would amount to a compound annual growth rate of 13% over that period.
Not surprisingly, the AI megatrend is the tailwind behind much of that forecast increase, particularly when it comes to leading-edge chips and the high-bandwidth memory (HBM) markets. This means that a small number of companies will reap much of the gain from that growth.
Knowing that, investors should watch the following three semiconductor stocks closely.
Nvidia
One cannot overlook Nvidia (NASDAQ: NVDA), as its GPUs provide so much of the parallel-processing power that has propelled the AI boom. The stock slipped to a cyclical bottom in late 2022. But then, OpenAI’s ChatGPT debuted with a splash, and investors discovered that Nvidia’s AI chips were powering it. The chipmaker’s value began to surge rapidly and fairly steadily. Despite a few setbacks along the way, since October 2022, the stock is up by nearly 1,600%.
Despite those gains, Nvidia stock likely has further to run. Although competitors have emerged, they have failed to unseat Nvidia from its dominant position in the AI accelerator space. Moreover, its gains might have been larger if not for the company’s approximately $5 trillion market cap. Investors may be questioning how fast any further gains can come, considering that no company has yet reached a $6 trillion market cap.
Nonetheless, Nvidia’s P/E ratio is 31, just under the S&P 500‘s average earnings multiple of 33. That’s the cheapest it’s been since 2019.
Also, it reported an 85% annual revenue increase and 211% yearly profit growth in the first quarter of its fiscal 2027 (which ended April 26). While the company’s financial growth is likely to slow given Nvidia’s massive size, that is an extremely low valuation considering how fast earnings have risen.
Furthermore, market caps do not have formal upper limits, and the P/E ratio is low enough that Nvidia’s stock is likely to face tremendous upward pressure. Though investors should not expect another 1,600% gain, Nvidia should continue to beat the market.
ASML
ASML (NASDAQ: ASML) is less well known than Nvidia, but its technology underpins the entire AI chip industry.
ASML is the world’s only manufacturer of extreme ultraviolet lithography (EUV) machines, and that equipment is key to the production of today’s most advanced chip designs. While most chip design companies outsource their manufacturing primarily to Taiwan Semiconductor Manufacturing (TSMC), its fabs depend on ASML’s equipment. Thus, TSMC, along with chip fabricators Samsung and Intel, have increased their purchases of EUV machines so that they can increase their production capacity to meet rising demand.
Also, EUV machines cost as much as $400 million each, and their owners rely on ASML to help maintain them. In the first quarter, around 28% of ASML’s top line came from service revenue.
Overall revenue in Q1 increased by 13% year over year, while net income surged by 17%. Trading at a P/E ratio of 58, ASML is an expensive stock, and its market dominance in EUV machines is the driver of that premium.
Still, its stock is up by around 120% over the last year. Despite these gains, its boom times are likely not over as companies scramble to meet the insatiable demand for advanced semiconductors.
SK Hynix
SK Hynix (NASDAQ: SKHY) is one of only three manufacturers of HBM in the world, and it holds the dominant share with about 56% of the market.
AI chips process massive volumes of data, and to work efficiently, they need that data to be stored nearby in memory chips. Since memory chip manufacturers designed HBM to support these AI workloads, they are benefiting from the same demand drivers benefiting their AI chip industry peers.
Additionally, a new partnership with Nvidia could further solidify SK Hynix’s dominance. Under the terms of the agreement, SK Hynix will develop HBM chips designed specifically to work with several of Nvidia’s key products.
In Q1, its revenue rose by 199%, and net income increased by 398%, both reflecting the fact that demand for HBM has far outstripped supply. Given that SK Hynix’s stock trades at 43 times trailing earnings, the stock appears cheap relative to the company’s growth rate.
SK Hynix will be a new ticker to most U.S. investors: The South Korea-based company became a dual-listed stock when it initiated trading on the Nasdaq Exchange on July 10. That makes it difficult to discern any trading patterns. Moreover, the memory market has a history of highly volatile boom-and-bust cycles. The HBM boom could eventually end with a supply glut and a brutal sell-off if history is any indication.
Still, even with the risk of an eventual downturn, SK Hynix’s low P/E ratio and potential for near-term growth mean investors should probably expect stock gains for the foreseeable future.
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Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML, Intel, Micron Technology, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
