In 2014, China quietly set up a state-led fund to invest in semiconductor manufacturing. The China Integrated Circuit Industry Investment Fund (now known as “The Big Fund”) would eventually raise $45 billion and distribute the proceeds into everything from wafer fabrication to chip design.
The results have been jarring. Late last year, Chinese state-owned Huawei quietly launched the Mate 60 Pro, a 5G phone that stunned analysts. The Western-sanctioned firm had acquired advanced 7-nanometer chips that only ASML (NASDAQ:ASML) and its customers were thought to produce. (Some believe that Huawei’s suppliers secretly procured ASML machines).
This is only the start. In an October briefing, the Pentagon warned lawmakers that China had designated artificial intelligence as one of its top priorities for warfare. And on Jan. 12, a report by the South China Morning Post revealed that Baidu’s (NASDAQ:BIDU) Ernie Bot chatbot was being used to help train the People’s Liberation Army’s AI systems.
AI nationalism is spreading beyond China as well. The United States plans to pour over $50 billion into local chip manufacturing. Saudi Arabia and the United Arab Emirates (UAE) have promised $40 billion to AI firms. Paris-based startup Mistral – a firm with neither a product nor customers – have managed to shape French legislation to its benefit.
Essentially, governments know that AI has incredible potential, and everyone is racing to come out ahead.
That’s why Eric Fry, InvestorPlace’s global macro investing specialist, is hosting the 2024 AI Wars Summit on Tuesday, January 23, at 7 p.m. Eastern. I’ll have more info on that for you later in this report… but you can save your spot now by going here.
In the meantime, our analysts here at InvestorPlace.com, our free news site, highlight three companies this week that are at the forefront of the coming AI Wars.
4 Stocks to Buy for the Coming AI Wars: Intel (INTC)
The greatest financial beneficiary of America’s AI largesse will be Intel (NASDAQ:INTC), the company that revolutionized central processing units (CPUs). Since its founding in 1968, the firm has gone from making 64-bit memory chips to becoming the world’s largest maker of advanced processors. At its peak in 2016, Intel held an 81% market share in global CPU shipments.
However, Intel staked its fortunes on vertical integration. Unlike rivals like Advanced Micro Devices (NASDAQ:AMD) or Nvidia (NASDAQ:NVDA), Intel manufactures the chips it designs. In good times, this helps turbocharge Intel’s bottom line by capturing more of the value chain. But several R&D missteps in 2018-2020 left Intel a full generation of chips behind. It is now struggling to produce 10-nanometer technologies even as rivals churn out 7-nanometer chips.
The hard truth is that Intel’s gambit of “leapfrogging” to 2-nanometer chips is risky at best. And even if it succeeds, the firm will likely trail Samsung in getting mass production into market.
But don’t count Intel out just yet. The Silicon Valley company will be the largest recipient of U.S. AI grants, which could pour over $4 billion into local semiconductor manufacturing plants (known as “fabs”). And future chip import restrictions will likely give Intel a leg up over rivals.
It’s why, in his Smart Money letter, Eric calls Intel the top candidate to become the next trillion-dollar AI company.
Simply put, Intel stands at the ready with a roster of offerings that can help power the AI Revolution.
The company remains a top dog and, even with some pullbacks, it has been on a growth trajectory recently. In fact, the stock soared nearly 100% in 2023.
Though Intel’s management have a daunting task ahead of them, their firm remains the single-best bet on American chip manufacturing… and, therefore… on the rising tide of AI nationalism.
2. Synopsys (SNPS)
Meanwhile, a technical winner of the coming AI Wars will be Synopsys (NASDAQ:SNPS), an Arizona-based firm that specializes in semiconductor design. The company has an unusually small exposure to Chinese demand; only 15% of sales are made there. And the rise of increasingly complex Western-made chips will raise demand for Synopsys’ services.
In short, Synopsis is the leader in digital electronic design automation (EDA), which helps chipmakers design new semiconductors. Modern chips can hold billions of components, and companies like Synopsys – and its chief competitor, Cadence Design Systems (NASDAQ:CDNS) – are needed to create and test these designs.
Shares of Synopsys have traditionally traded at a rich premium. The 37-year-old firm earns extremely high returns thanks to it and Cadence’s duopolistic positions; markets are keenly aware of this.
But a recent acquisition of simulation software maker ANSYS has put investors on edge. Since mid-December, shares of Synopsys have fallen 12% over concerns that the electronic design automation (EDA) firm was overpaying for its latest acquisition.
We see the selloff as a rare opportunity to buy. Synopsys only paid a 20% premium to market prices for ANSYS, and the path to merging is relatively straightforward because their products are complementary. In a recent update, Samuel O’Brient notes for InvestorPlace.com that Wall Street analysts now forecast upside potential of 25%.
“This automation firm is in an excellent position to keep riding the AI wave to new heights,” O’Brient notes. “Wall Street… currently features nine buy ratings and zero sells.”
InvestorPlace analyst Luke Lango sees even greater upside ahead. The company is a core pick in his “Top 10 Investment Themes for 2024” for its exposure to huge demand tailwinds and increasing amounts of AI chip customization:
We expect that because they are the building blocks of AI applications – and AI applications will likely become a global ubiquity over the next several years – demand for AI chips will continue to grow for the next decade. However, we also believe that in 2024, demand for AI chips will start to shift away from Nvidia and toward other AI chipmakers thanks to chip shortages, customization needs, and price sensitivities
3. Palantir (PLTR)
A longer-term winner of the AI Wars will be Palantir Technologies (NYSE:PLTR), a big-data platform focused on U.S. government applications.
Palantir has historically struggled with corporate sales. According to an analysis by Morningstar, the big-data firm spent $467 million on marketing in 2022, yet still counts only 200 corporate clients.
However, Palantir is a behemoth when it comes to government-based work. The firm generates over $1 billion from public-sector contracts annually, and that figure is set to grow to $1.6 billion by 2025.
At the core of this is Palantir’s proven ability to handle mass amounts of sensitive data. The U.S. military rightly worries about where it sends its confidential information, and Palantir’s intertwined history with the CIA, as detailed by Chris MacDonald at InvestorPlace.com, gives it credentials that no other firm can match.
The increasing appetite for AI will only increase demand for Palantir’s services. Militaries worldwide are realizing that AI and machine learning (AI/ML) will become essential in modern warfare, and Palantir has already begun seeing the effects of this demand. In its most recent quarter, the Denver-based firm saw deal values double to $116 million and operating margins surge to 29%.
In a minor twist, the rise of the AI Wars also could trigger interest from corporate America. Many firms have become wary of sending copyrighted data (or any other sensitive information) to tech giants, especially with the rise of generative AI. In January, The New York Times filed a lawsuit against both OpenAI and Microsoft (NASDAQ:MSFT) for using the newspaper’s articles without permission.
Meanwhile, firms like Palantir operate as platforms, which mean they provide the data analysis tools, while leaving control of data to their customers. The company’s AI platform is also seeing initial success. That’s why Louis Navellier and his staff recently note that it won’t take much to kick Palantir back into high gear.
PLTR stock bulls can point to the initial success with Palantir’s Artificial Intelligence Platform. This platform has been gaining customers at a rapid clip, with the number of customers recently rising by 50%… As seen in Q3 results, customer growth overall (34%) has been outpacing revenue growth…
While not for certain, this may suggest that revenue and earnings growth this year could come in higher than sell-side analyst forecasts… particularly for Palantir’s commercial segment
Though Palantir’s shares trade for a relative premium, a steadily rising tide of AI and big-data demand will eventually help the firm fill in that gap.
4. Tyler Technologies (TYL)
Tyler Technologies (NYSE:TYL) is a leader in the under-the-radar niche of government operational software. It has the largest installed base of any firm, with over 40,000 client installations, and manages everything from veterans’ benefits to school enterprise resource planning (ERP) systems.
It’s a highly lucrative business. In 2022, the company generated $164 million in profits, while having to reinvest just $50 million. Growth has also been strong. Since 2018, the Texas-based company has seen its recurring revenue grow 22% annually.
Since 2022, however, shares have fallen 25% on fears of a growth slowdown. State governments were beginning to run out of Covid-19-era stimulus funds, making Tyler dependent on acquisitions to fuel its expansion. Net income growth would slide from 29% in 2021 to just 4% in 2023.
But renewed concern over cybersecurity threats means market leaders like Tyler will quickly pull ahead. Local governments are becoming increasingly aware of the threats of AI-enhanced hacking and are turning to better-known providers to help. Even larger municipalities aren’t immune. In 2023, the city of Dallas spent months recovering from an attack that hindered the city’s 911 emergency services, among others.
Analysts at Morningstar note that Tyler “used to fight for every $100,000 deal,” given how penny-pinching local governments could be. But now that Tyler has established enough of a reputation, political leaders are now calling up Tyler for products. Analysts believe the company’s net income will surge 14% this year and 16% the next.
Tyler Technologies is so obscure that even InvestorPlace.com rarely covers this blue-chip firm. Alex Sirois last wrote about Tyler almost a year ago in an article titled “The 7 Most Undervalued Stocks and Cryptos 2023.” And Ian Bezek hasn’t mentioned the firm since 2022.
But make no mistake. The risks of cybersecurity threats are growing. At Davos this year, JPMorgan’s head of wealth management revealed that her firm receives 45 billion hacking attempts per day – a figure only made possible by AI automation. And though top-tier firms like Tyler Technologies aren’t immune from data breaches either, governments are increasingly wanting to roll the dice on the most established players. Shares of Tyler likely have a 15%-20% upside in 2024.
The 10 Stocks of the AI Wars
These four companies will slowly grind higher as governments re-onshore their AI and chipmaking needs. A similar fight happened in the 1970s through the early 1990s between the U.S. and Japan, and governments this time around are even more aware of the risks of falling behind.
But Eric sees even greater potential for many smaller companies. These relatively unknown firms have even greater upside, thanks to their smaller starting points. And many investors will only need to land one “multibagger” to turn an ordinary portfolio into an extraordinary one.
In fact, Eric has spotted a catalyst that he believes will kick the AI Wars into even higher gear on Feb. 1… That’s why he’s holding the 2024 AI Wars Summit on Tuesday, January 23, at 7 p.m. Eastern.
During this event, Eric will explain the impact of this date, why he believes it could make or break investors’ financial success this year, and what you can do to position yourself accordingly.
Click here now to save your spot.
On the date of publication, Thomas Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
