Back to top

Image: Bigstock

AI Backdoor: These Stocks are Quietly Powering the Boom

Read MoreHide Full Article

Although we have all become very familiar with the Artificial Intelligence darlings like Nvidia (NVDA - Free Report)  and Microsoft (MSFT - Free Report) , there are a handful of companies that are quietly powering this revolution, creating the tools and infrastructure that enable AI's remarkable capabilities.

While AI advancements grab headlines, these companies play a crucial, yet often unseen, role in its development. Here, we dive into three such companies:

Cadence Design Systems (CDNS - Free Report) , ASML Holdings (ASML - Free Report) , and Arista Networks (ANET - Free Report) .

It is also worth noting that these companies aren’t overly reliant on the burgeoning technology either, as the stocks have been mega-performers in their own right. Cadence Design Systems, ASML Holdings, and Arista Networks have all trounced the broad market over the last decade, further cementing them as worthy investment considerations.

Zacks Investment Research
Image Source: Zacks Investment Research

Cadence Design Systems: Architects of the AI Chip

Imagine intricate blueprints for miniaturized cities teeming with billions of transistors. That's what Cadence Design Systems does, providing Electronic Design Automation (EDA) software that helps design and verify complex integrated circuits (ICs), the brains powering everything from smartphones to AI supercomputers.

Cadence plays a crucial role in developing the specialized chips needed for AI applications. Their tools enable engineers to create efficient, high-performance AI chips with features like specialized processing units and optimized memory access. As AI demands grow, so too will the need for advanced EDA solutions, potentially boosting Cadence's prospects.

Cadence Design Systems currently enjoys a Zacks Rank #2 (Buy) rating, indicating upward trending earnings revisions. Expectations have been upgraded across timeframes for the chip designer.

CDNS stock is already up 10.4% YTD, showing considerable momentum.

Zacks Investment Research
Image Source: Zacks Investment Research

ASML Holdings: Building the Foundation

At the heart of chip manufacturing lies ASML Holdings, the undisputed leader in extreme ultraviolet (EUV) lithography systems. These complex machines etch minuscule circuit patterns onto silicon wafers, enabling the creation of ever-denser, more powerful chips.

EUV lithography is crucial for producing the advanced chips needed for AI applications. ASML's dominance in this space positions them as a key player in enabling the AI revolution.

Although ASML has a Zacks Rank #3 (Hold) rating, signaling a mixed earnings revisions trend, it still has a lot going for.

ASML sits in the top 7% of the Zacks Industry Rank and boasts very impressive EPS growth forecasts over the next 3-5 years. Over that period, earnings are expected to climb 20.3% annually. Additionally, ASML has a near-monopoly in EUV lithography, which has incredibly high barriers of entry and recurring revenues, securing its business future.

The stock market has been strong since the start of the year, but ASML Holdings has been stronger. The stock is up an incredible 21.3% YTD.

Arista Networks: The AI Communication Hub

As AI models grow larger and more complex, efficient communication between data centers becomes crucial. Enter Arista Networks, a leader in high-performance data center networking solutions.

Arista's switches and routers are specifically designed to handle the demanding workloads of AI applications, enabling efficient data transfer and communication between AI systems.

As can be seen in the chart below, both ANET’s share price and earnings revision trend have been steadily climbing higher over the past three years. Arista Networks has a Zacks Rank #2 (Buy) rating, further increasing the odds of another advance in the share price.

ANET stock has already rallied 13.7% YTD, demonstrating strong demand from investors.

Zacks Investment Research
Image Source: Zacks Investment Research

Bottom Line

Because none of these stocks are household names, investors who can dive a little deeper into the minutiae of the industry can gain a real edge. But don’t get it twisted, just because they aren’t well known doesn’t mean their contributions aren’t vital to technological development.

By enabling the creation of specialized chips, building the manufacturing foundation, and facilitating high-speed data communication, they're laying the groundwork for AI's continued advancement.

Published in