By the numbers, Tom Brady is the best quarterback to ever play football. Some people will tell you he was the best athlete in any sport… ever.
His career is littered with all sorts of interesting statistics.
He played for 23 seasons and appeared in the Super Bowl 10 times. In other words, for more than two decades, it was basically a coin flip that Brady would be there.
No NFL team has a winning record against him. He’s also only one of four players to have beaten all 32 teams in the league.
During his entire career, he was never mathematically eliminated from the playoffs. In other words, he never played a game where it wasn’t at least possible he’d wind up in the Super Bowl.
Over his career, he threw for 89,214 yards. That would be nearly 51 miles. It’s also 40,000 more yards than the rest of the 2000 draft class combined.
For football fans, they either loved Tom Brady or loved to hate him. But they paid attention to him… to the exclusion of almost everybody else.
The same thing happens in investing.
Right now, Nvidia (NVDA) is the superstar of artificial intelligence (“AI”) and the stock market more broadly. NVIDIA’s H100 and RTX series chips are certainly the MVPs of the greatest game capitalism has seen in decades. Everything from self-driving cars to ChatGPT runs on them.
The company is tracked meticulously, it’s discussed almost non-stop on the finance shows, and its earnings are treated like a national holiday.
But every great star is eventually replaced. Even Tom Brady had to hang it up eventually.
I’m not saying Nvidia isn’t an important company (it is) or that it won’t be an integral part of the AI buildout for the near future (it probably will be).
But if you want to profit from investing in AI over the long term, there is a better way than putting all your chips on the star players getting all the headlines.
First, it’s a crowded trade. Nvidia’s $4.3 trillion market cap leaves no doubt about that. The second point is what I call the “Stadium Effect.”
The Builders
A professional sports game is a lot more than people running around on a field or court. The SoFi (SOFI) Stadium in Los Angeles for the Rams is considered the most expensive built at $5.5 billion.
Those millions of viewers don’t happen by accident, either. If you add up the total value of all the NFL TV network deals, it’s estimated at $100 billion to $110 billion. And you thought Dak Prescott’s $240 million four-year deal was a lot of money.
These “behind the scenes” parts of the NFL ecosystem are much more reliable year-to-year than any one team or player’s performance. They profit no matter who sells the most jerseys each year. These drive the NFL at least as much as its players, and that includes financially.
Today, I’ll share two “AI builders” that I believe are great buys and one to watch out for.
Applied Materials: Supplying the Factories
Many investors don’t realize it, but Nvidia doesn’t make its famous chips. It designs them. Applied Materials (AMAT) sells specialty tools that allow semiconductors foundries like Samsung and Taiwan Semiconductor Manufacturing (TSM) to create the technological marvels that Nvidia designs.
It gets better.
Applied Materials isn’t married to Nvidia. They sell precision tools to AMD and everyone else in the AI chip game. This makes Applied Materials more diversified and less risky, plus it trades at just 17 times forward earnings. That’s less than half price compared with Nvidia’s current valuation of 40 times.
That dirt-cheap 17 price-to-earnings ratio isn’t because of slow growth. Since 2020, earnings per share have increased 113%.
ASML: The Dutch Monopoly
The Dutch company ASML Holding N.V. (ASML) makes the world’s only extreme ultraviolet lithography machines. These gigantic machines cost $180 million to $380 million each and are the only way to etch the nanoscopic patterns that make chips AI grade.
No other company has this technology, so every chip manufacturer must buy from AMSL. Based on my research, AMSL has the best “monopoly” in the entire AI ecosystem. It’ll be no surprise then that the company stated in its 2024 annual report that it had an official backlog of over $40 billion. And the more advanced chips become, the more valuable AMSL’s monopoly becomes. In 2020 at the start of the AI boom, ASML was already generating over $4.3 billion in annual profits. Today, it’s over $11 billion. And like Applied Materials, you can pick up shares of ASML today at a steep 33% discount to Nvidia’s valuation.
Super Micro Computer: A Tired AI Workhorse
A professional sports game without lights, microphones, or TV cameras isn’t much of a business. It needs the whole ecosystem “powered up” to have real value. It’s no different with AI. And many of the data centers enabling everything AI use Super Micro Computer (SMCI) products.
Super Micro specializes in making cutting-edge servers for AI. Advanced cooling, networking equipment, and Nvidia GPUs all come together to handle the huge demand and stress that comes with training AI models.
For years, Super Micro was innovating and adapting faster than its peers. That lean business model allowed them to gain market share against rivals like Dell Technologies (DELL) and HP (HPQ) in the past.
While Super Micro is a viable business, it’s not what it used to be. In short, the aggressive growth strategy came at a steep cost. The company’s margins have dropped steadily, and its rivals are starting to gain back market share. Dell, for example, recently won the mega-deal to supply AI hyperscaler CoreWeave.
Unlike Applied Materials and ASML, Super Micro lacks the competitive advantages that make it a long-term winner.
That said, it’s worth keeping an eye on. If Super Micro can turn things around and begin to win back market share, it may be worthy of your investment.
Building the Foundation of AI
The hype around Nvidia and OpenAI is real, and for good reason. They helped ignite the AI revolution. But when it comes to investing, the best deals rarely make headlines. You’d need to get into those companies years ago to have the potential for truly massive gains. And there is a lot of risk that their star status could fade over time.
Applied Materials, ASML, and other AI infrastructure plays have just as solid business models and arguably even stronger competitive advantages. Applied Materials $129 billion market cap is nothing to sneeze at, but it’s just 3% of Nvidia’s. Which stock do you think is really more likely to triple as AI continues to grow?
That said, you still need to do your homework. As I pointed out with Super Micro, not every AI star will shine forever.
Regards,
Stephen Hester
Chief analyst, Wide Moat Research
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