Some call AI a “revolution” akin to the development of the internet, or a modern-day “gold rush” with potential to boost productivity and corporate earnings. But others have labeled the technology nothing more than a “narrative” that investors are clinging to as stocks climb ever higher, a justification for unwarranted price appreciation. Fortune 500 companies have spent billions on AI, but so far, there’s been little economic data to prove any productivity-enhancing abilities.
Still, most experts agree that those benefits will come—it’s just a matter of when. And some companies are already making a killing from the AI boom, according to Erika Klauer, a technology equity portfolio manager at Jennison Associates, an investment management firm with $194 billion in assets under management. “AI is proving to be worth the investment for many industries,” she told Fortune. “It’s an extraordinary opportunity.”
Klauer and Jennison, which focuses on long-term bets on companies with serious growth potential, have leaned into the AI boom, gobbling up shares of the semiconductor giant Nvidia. As Mark Baribeau, head of global equity at the firm, told Fortune late last year: “With generative artificial intelligence, we’re entering the fourth era of computing. And the most important company in the fourth era of computing will be Nvidia.”
At the time, Baribeau highlighted Nvidia as his top stock pick for 2024, and it’s since surged over 80%. For Klauer, even after the AI boom of the past few years, there are a few key sectors that will continue to drive growth for AI-linked stocks like Nvidia. ”There are probably two most important new markets that are able to monetize the investment required for AI, and those are healthcare and sovereigns,” she said.
Klauer highlighted medical imaging, genomics, and drug discovery as three areas in the healthcare sector that are already creating “much higher demand for AI services than was previously expected.” But it’s the desire among nation-states to develop their own AI systems that Klauer believes will really drive growth for a few key AI companies.
“On the sovereign side, you have countries who do not want to have their models trained on U.S. norms and customs. They would like to have their own version of ChatGPT, with training on their own languages…their own archives, their own cultural nuances,” she said. “And so those governments are coming to search out their own AI initiatives—and that is an extraordinary opportunity.”
Klauer explained that she’s so bullish on nation-states’ desire to get into the AI game because it’s not something that is driven or impacted by the state of the economy. This AI spending will come “more from a social and national security perspective,” she said, and that means stable, long-term growth.
All of the companies that Klauer believes will thrive over the next decade are firms that can take advantage of the key healthcare and sovereign growth areas by providing the chips, chip-making equipment, and data centers where AI is run. They may not be cheap, but good things rarely are.
So for investors with a long-term outlook, these are Klauer’s top three AI stocks for the next decade:
ASM Lithography
The first company Klauer highlighted was the semiconductor equipment giant ASM Lithography. You’ve probably never heard of the $402 billion market-cap company, but you’re also most likely unknowingly using their technology right now. ASM Lithography makes the equipment, including lithography machines, integrated circuits, and more, that enable other companies to create semiconductors.
All of the world’s most advanced foundries—the factories that produce semiconductors—currently use ASM Lithography’s technology, including Taiwan Semiconductor (TSMC), Samsung, and Intel. And with companies releasing new AI chips every year to handle new generative-AI systems, Klauer said semiconductor equipment is going to become increasingly sophisticated, which should benefit incumbent firms like ASM Lithography.
The company has a Warren Buffett-style moat, she argued. Berkshire Hathaway’s Buffett has famously argued that great business models often have significant barriers to entry, or moats, that prevent competition from coming in and ruining the party. Klauer said ASM Lithography’s moat is the technology that allows it to lay down layers of transistors necessary for semiconductors to function.
“ASM Lithography is the one that is able to take the pictures or lay down the transistors that are 1/100th, 1/1000th, or 1/5000th the width of a human hair,” she explained. “It’s an extremely complex optics core competency, that is basically a market that ASM Lithography has dominated for many years. And as the chips are becoming more complex, this plays into their strength as a technology leader—and it also manifests in higher pricing.”
Nvidia
The semiconductor giant Nvidia is Klauer’s second top AI stock for the next decade. After surging 1,743% over the past five years, some investors are beginning to question whether the semiconductor giant Nvidia can continue its run, but Klauer and Jennison Associates are still believers.
“At Jennison, we do always take a long-term view. And we tend to stick with the companies that we think can execute, gain, share, hold or increase their pricing and innovate to expand the market over time. And there are many companies that fit that bill, but Nvidia is literally at the top of that list,” she said.
Klauer highlighted growth opportunities in software, autonomous vehicles, robotics, augmented reality, and gaming over the next decade. She also noted Nvidia has already managed to take advantage of the healthcare industry’s push into AI. The company turned in healthcare revenues of over $1 billion in its fiscal year 2024, three years ahead of their old target.
“So I think Nvidia is really well positioned from a revenue growth perspective, margin perspective, the depth of the management team is superb, the depth of the bench is superb,” Klauer added. “And the company is appropriately run as far as from a balance sheet and operational control perspective, too, so certainly, Nvidia is at the top of that list.”
Microsoft
Microsoft is Klauer’s final top AI stock for the next decade, but it isn’t the company’s investment in the now famous AI startup OpenAI that has her feeling bullish. Microsoft’s cloud computing platform Azure is the real draw.
Azure has been taking market share from its rival Amazon Web Services for years now. And in the final quarter of last year, Azure’s revenue surged 30% from a year ago, while AWS saw only 13% year-over-year growth. Klauer expects this rapid growth to continue amid the AI boom. Microsoft is set to provide “the essential backbone” for what Klauer calls “AI factories” over the coming decade.
“Right now, we still have maybe 20% of all workloads accelerated inside the data center. And not only are we probably going to get to 100%, but the net number of workloads is going to inflect positively because there’s so many different reasons why you want to create new workloads to be accelerated because of their utility across so many different industries,” she said.
Honorable mention: Broadcom
A quick honorable mention here for Broadcom, since Klauer said picking her top three AI stocks was “almost like asking me to pick my favorite child.” The $625 billion tech giant is known for making a range of semiconductor and infrastructure software products, but it’s networking chips that Klauer believes make Broadcom a good long-term bet. In order for AI systems to get sufficient computing power to operate, they need huge data centers filled with thousands of computers, and networking chips are critical to these data centers.
“Networking chips are like traffic cops that are directing the signals around the data center,” Klauer explained. “So they’re very important. And they’re getting faster and faster and faster in their ability to direct that traffic.”
Klauer argued “there’s really one company that dominates in the most important way in our review, and that is Broadcom, which is why it’s also one of our most favorite long-term picks.”
Source link
