Buy shares of these companies helping fuel the ‘AI Gold Rush,’ analyst says

By Tomi Kilgore

Oppenheimer suggests investing in companies addressing “severe” shortages of chips and tools needed to make AI hardware

While demand for AI use is expected to continue growing, Oppenheimer analyst Edward Yang recommended investors buy shares of several companies that are doing what it takes to support that demand.

“AI computing demand doubles every six months, but hardware performance increases only every two years, creating a severe, structural shortage of advanced semiconductors and the tools needed to make them,” Yang wrote in a note to clients.

This shortage in supply of chips and chipmaking tools means investors may shift their focus to physical transistors. Manufacturers of this “picking and shoveling” wafer mill equipment are Nvidia Corp. It could help solve growing “technical challenges” for AI chip makers like (NVDA).

Yang said investors include Nvidia and Taiwan Semiconductor Manufacturing Co. Ltd. He said that as “low-key” chip infrastructure companies like (TSM) (TW:2330) that support all the popular chip makers could be rewarded for looking beyond the obvious. It forms the backbone of the artificial intelligence megatrend, which is still in its infancy.

Yang, Onto Innovation Inc. (ONTO) and Ultra Clean Holdings Inc. (UCTT) with outperforming shares. He set a $260 price target for Onto’s shares, indicating a 27% upside from current levels, while his $70 target for Ultra Clean shares suggests a 90% upside.

He said Onto is “an important AI enabler.” The Massachusetts-based company produces advanced packaging and efficiency-enhancing tools for high-bandwidth memory (HBM) and includes Nvidia’s largest suppliers, Taiwan Semi and SK Hynix Inc. (KR:000660) delivering triple-digit percentage growth through.

California-based Ultra Clean has “emerging but thriving franchises” in HBM, advanced packaging and vacuum-based extreme ultraviolet lithography (EUV) tools, Yang said.

The company is also protected from any U.S.-China trade disputes over semiconductors, given its local presence supplying chip equipment makers in China, he said.

The “AI gold rush” creates long-term bottlenecks that Yang believes can be alleviated by chip infrastructure companies like Onto and Ultra Clean, giving them “toll-taking” status.

Meanwhile, Yang, KLA Corp. (KLAC) and Ichor Holdings Ltd. (ICHR) with performance ratings. And shares of Cadence Design Systems Inc. (CDNS) started out underperforming.

-Tomi Kilgore

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09-28-24 0716ET