The rise of artificial intelligence (AI) will be one of the most important trends of the century. Companies that play leading roles in driving this incredible technology shift forward will likely see incredible business performance and deliver market-crushing returns for shareholders.
With that in mind, ASML Holding ( ASML -2.30% ) and ON Semiconductor ( ON -2.51% ) stand out as top stocks for long-term investors looking to benefit from the AI revolution. Let’s take a closer look at why these two companies are on track to facilitate and benefit from the dawning age of artificial intelligence.
1. ASML Holding
ASML’s extreme ultraviolet lithography (EUV) machines are helping semiconductor manufacturers boost the number of transistors they can fit into a chip, opening the door for improved power and efficiency. AI will increasingly rely on powerful 7-nanometer (nm) and 5nm chips, and companies will likely be making the jump in the next few years to 3nm and 2nm chips that deliver even better performance and open the door for even more advanced artificial-intelligence and machine-learning applications.
Without ASML’s proprietary EUV technology, manufacturing the necessary hardware would be virtually impossible, and the business is already benefiting from strong demand in a variety of product categories in addition to AI-related chips. In the fourth quarter, the company posted a 54% gross margin, a 36% net income margin, and approximately 17% year-over-year revenue growth. Meanwhile, bookings jumped roughly 14% sequentially and surged 66% compared to the prior-year period.
The semiconductor-equipment leader closed out last year with its sales up 33% on an annual basis, and net income surged 65.5% in the period. ASML also stands out as an attractive stock for dividend growth investors, even if its current yield of roughly 1% probably won’t satisfy investors looking for big payouts right away.
The company doubled its dividend payout last year and has raised it roughly 293% since 2017, and management has plans to continue returning value to shareholders through more payouts and stock buybacks. Soaring demand for semiconductors makes ASML a great pick-and-shovel play for benefiting from the evolution of AI and a huge range of other product-and-service categories, and this dynamic has the company in great shape to continue driving capital appreciation and returning cash to shareholders.
2. ON Semiconductor (also known as Onsemi)
AI will only come to play an increasingly important role in automotives, industrial machinery, data centers, and other fields, and Onsemi is providing solutions to meet emerging demands. The company makes sensor chips that help machines see the world and power chips that help electric vehicles (EVs) and machines regulate energy consumption for improved efficiency.
Onsemi estimates that the total addressable market for its intelligent-power solutions will grow at a 6% compound annual growth rate (CAGR) from 2021 through 2025, while the addressable market for its intelligent-sensing solutions is expected to increase at 10% CAGR across the stretch. These growth targets suggest total addressable markets of $64 billion and $10 billion at the end of the projection period, respectively.
Onsemi sees EV sales accounting for more than 50% of the total global auto market by 2028 and continuing to grow from there. Check out the chart below for an estimate of annual vehicle market share by category through 2030.
Onsemi’s power-management solutions could play a key role in improving EV performance and making machines more efficient, and these chips should also see rising demand in data centers and other product categories. Additionally, smart cars and industrial machinery will increasingly make use of sensor technology so that performance can be improved and automated. The semiconductor company is poised to benefit from multiple long-term growth trends, and its stock looks like a great play for investors looking for AI stocks with market-crushing potential.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.