Buy the stocks of these companies helping fuel the 'AI gold rush,' analyst says

By Tomi Kilgore

Oppenheimer recommended investing in companies that address the 'severe' shortage of chips and the tools needed to make AI hardware

With demand for the use of artificial intelligence expected to continue to surge, Oppenheimer analyst Edward Yang recommended investors buy the stocks of a couple companies that make things needed to support that demand.

"AI compute demand doubles every six months, but hardware performance 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 deficit in the supply of chips and chip-making tools means investors can shift their focus to physical transistors. These makers of "picks-and-shovels" wafer fab equipment can help solve the increasing "technical challenges" of AI chip makers like Nvidia Corp. (NVDA)

Yang said investors can be rewarded for looking beyond the obvious, as the "unglamorous" chip infrastructure companies that support the all-the-rage chip makers, like Nvidia and Taiwan Semiconductor Manufacturing Co. Ltd. (TSM) (TW:2330), provide the backbone of the AI megatrend, which is still in the early stages.

Yang initiated coverage of the shares of Onto Innovation Inc. (ONTO) and Ultra Clean Holdings Inc. (UCTT) with outperform ratings. He set a $260 price target on Onto's stock, which implies a 27% upside from current levels, while his $70 target on Ultra Clean shares suggests a 90% upside.

He said Onto is a "key AI enabler." The Massachusetts-based company makes yield-enhancement tools for advanced packaging and high-bandwidth memory (HBM), and generates triple-digit percentage growth through Nvidia's top suppliers, Taiwan Semi and SK Hynix Inc. (KR:000660).

Yang said that California-based Ultra Clean has "nascent, but booming franchises" in HBM, advanced packaging and vacuum-based extreme-ultraviolet-lithography (EUV) tools.

He said the company is also insulated from any U.S.-China trade friction surrounding semiconductors, given its local presence, supplying chip-equipment makers in China.

The "AI gold rush" is creating 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 also started coverage of shares of KLA Corp. (KLAC) and Ichor Holdings Ltd. (ICHR), but with perform ratings. And he initiated Cadence Design Systems Inc.'s stock (CDNS) at underperform.

-Tomi Kilgore

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09-25-24 1212ET

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