For those who believe in the long-term adoption of artificial intelligence, the recent sell-off of the world’s largest AI-focused names will present an opportunity.
Concerns about valuations and the circular nature of investments, partnerships, and commercial relationships have led to dramatic pullbacks in companies at the forefront of the AI arms race.
Frothy valuations have inevitably drawn comparisons to the Dotcom boom and bust, and a growing number of analysts are calling a bubble.
But many aren’t and still believe there are legs in the AI trade as the technology is implemented across the global economy.
If you’re in the latter camp, these three AI stocks are well worth a look.
Nvidia
Nvidia is an obvious choice, but we’d be amiss to omit the world’s biggest AI stock from the selection.
Recent results were initially well received, as the chipmaker beat revenue estimates and provided encouraging guidance. However, nagging doubts about supply chain constraints and whether they will be able to sell their most powerful chips to China helped fuel a reversal on the day of release.
Nvidia’s meteoric rise makes it an easy target for the naysayers. Softbank selling its entire stake hasn’t helped either. But you can’t argue against its scale and revenue generation.
The firm generated record revenue of $57.0bn in Q3, up 22% from Q2 and 62% more than a year ago. Growth was driven by data centre revenue, which rose 25% to $51bn.
The company is still experiencing soaring demand for its chips, especially for its flagship data centre Blackwell products.
“Blackwell sales are off the charts, and cloud GPUs are sold out,” said Jensen Huang, CEO of Nvidia, in their recent earnings release.
“Compute demand keeps accelerating and compounding across training and inference — each growing exponentially. We’ve entered the virtuous cycle of AI. The AI ecosystem is scaling fast — with more new foundation model makers, more AI startups, across more industries, and in more countries. AI is going everywhere, doing everything, all at once.”
The recent pullback sees Nvidia trading at just 23x forward earnings. That isn’t expensive at all.
ASML
ASML is a Netherlands-based company that manufactures the world’s most advanced lithography machines, which are essential equipment for producing semiconductors.
Their extreme ultraviolet (EUV) lithography systems are the only tools capable of creating the tiny, densely packed transistors needed for the most powerful AI chips from companies like Nvidia, AMD, and Taiwan Semiconductor Manufacturing Company.
Without ASML’s technology, it would be impossible to manufacture the sophisticated processors that power large language models, data centres, and AI training systems.
No ASML would mean no chips and no AI boom.
ASML’s deep moat is likely the reason its shares are trading just 15% below recent highs. The stock certainly isn’t in bargain territory, but the dip looks like one that could be bought into.
Vistra Corp
AI data centres are expected to consume around 12% of total US power by 2030, up from 4% in 2023.
Vistra Corp is one of the largest power generators in the United States, operating a diverse portfolio of nuclear, natural gas, coal, solar, and battery storage facilities that produce approximately 41,000 megawatts of electricity.
Imagine SSE with some fossil fuels and nuclear thrown into the mix.
Vistra has become increasingly important to AI development because data centers require significant amounts of reliable, constant electricity to power their servers and cooling systems.
Vistra’s nuclear plants are particularly valuable for AI infrastructure since they provide 24/7 carbon-free baseload power, making the company a key supplier for tech companies building AI data centers.
As well as using its existing capacity to power AI data centres, Vistra is exploring co-location partnerships to build new power facilities near new data centres to secure stable power flow.
After hitting a 52-week high of $219, Vistra shares have fallen to $168. Although shares are substantially lower than recent highs, their historical valuation still looks rich at around 40x trailing earnings. Analysts, however, expect earnings to pick up significantly in the coming years with forward earnings multiples around 20x.