Three AI Chip Plays That Are Cheaper Than ASML And Nvidia

Just check out this chart: AMAT’s 23x price-to-earnings (P/E) ratio (purple line in the chart) makes the firm’s valuation substantially lower than ASML’s, and the cheapest of our four SME firms.

2. Lam Research (LRCX)

Lam’s $88 billion market value makes it the second-biggest of the trio. Like AMAT, its machines are used in the chipmaking process, but Lam’s are a tad more specialized. They’re focused on etching and deposition, two critical production stages, meaning Lam should be in the right spot to ride a semiconductor wave.

On the face of it, Lam’s valuation looks pricier at 27x P/E (yellow line). That, though, is partly because analysts expect the firm’s profit to post the biggest drop of the trio next year. (See, Lam sells kit to firms that produce chips more likely to feel the effects of weaker economic climates, like memory chips.) But because investors are still optimistic about the firm’s future, the “P” for price hasn’t fallen to match the “E” for those potentially lower earnings. The result: a higher P/E ratio.

3. KLA (KLAC)

KLA’s products are a bit different: chipmakers don’t use them in the actual manufacturing process. Instead, they use them like giant quality control machines. By spotting and diagnosing various problems – and importantly, by offering solutions too – during the manufacturing process, chipmakers can cut time and money from this very costly stage. And since KLA’s kit is used in the more advanced production processes, it could be seen as a purer play on AI. That might explain why its shares are a tad more expensive than AMAT’s 25x P/E (orange line).

What are the risks?

First, the elephant in the room: AI could be a flash in the pan. But even besides that, SME companies are highly volatile. Their sales and profit swing wildly, in tune with the rocky semiconductor and general economic cycles. That’s the “bullwhip” effect: the further away you are from the end product – that’s our phones, laptops, cars, and so on – the bigger the potential swings in sales. So if the economy takes a turn for the worse, say, SME firms’ profit could end up stuck in a slump.

The Bullwhip effect: Source: Sketchplanations.

The semiconductor industry’s actually in a downturn right now, with only a few areas like AI and auto chips bucking the trend. Just take a look at Intel’s share price in the chart if you don’t believe me. On top of that, any worse-than-expected demand for stuff like PCs or cell phones could bullwhip down the supply chain, and hit SME companies’ sales and profit even harder.

Thing is, those short-term risks are precisely what’s kept a lid on the three SME firms’ stock valuations. And actually, downturns can be the best time to consider investing in cyclical businesses. As night follows day, economic weaknesses often give way to renewed, plump profit. So if you can stay focused on the long term instead of the short, and you don’t want to cough up for the likes of Nvidia, then these three stocks might just be the way to go.

 

 

Jeff Brown, PhD.

Founder & Chief Investment Analyst