The Surge of AI Investment in 2023
2023 has been marked by a significant surge in AI investment, offering promising long-term opportunities in areas from chip manufacturing to end-user devices. This investment boom has notably boosted tech industry stocks. However, this surge also poses challenges in identifying long-term winners, as many stocks might already reflect their AI growth potential somewhat. Investing in this rapidly evolving field requires careful analysis and a strategic approach.
Back in September, we published a buy rating on Intel (NASDAQ:INTC). We believed that its foundry business and its integrated model would give the company a long-term competitive edge. Given that the foundry business accounts for a very small fraction of Intel’s overall sales, it seems that investors have overlooked the business’s importance in building the company’s ecosystem moat.
In this article, we want to delve deeper into why, in our opinion, Intel is well-positioned for the near to mid-term in terms of ecosystem health.
Yes, the entire semiconductor industry stands to benefit from the AI boom ahead. But we believe Intel, in particular, is poised to be one of the biggest winners.
The Dominance of the B2B Market in AI
First, let’s consider which specific areas stand to benefit most from AI in the coming year. A recent addressable market analysis by Kelvin Mu highlighted that the total addressable market (“TAM”) for business uses of AI could be 10 times bigger than consumer applications. This immense potential market could revolutionize companies as they integrate AI into their operations and products.
While Mu’s market size estimates may still be rough, his B2B focus aligns with what we’re observing. At this stage, it is clear that enterprise adoption of AI is far greater than consumer use cases like chatbots.
The B2B opportunity is also evident in Nvidia’s recent financials. In Q3 2023, their data center revenue grew 278% and now makes up almost 5 times their still-strong gaming chip business, which grew 81%.
So, the business market currently looks more promising than consumer applications. As we evaluate investment options, we should focus on companies well-positioned to capitalize on AI in enterprise settings. The B2B market is where the real money will be made.
For investors right now, companies enabling enterprise AI adoption seem like safer bets than those focused on fickle consumer use cases. The B2B market may not be as flashy as imagining AI chatbots in every home, but for investors, it represents a bigger and more realistic opportunity in the near term.
When looking at valuations for the major players in AI/semiconductors, traditional P/E analysis isn’t too useful right now. Instead, let’s look at metrics like P/S and EV/S ratios.
By these measures, Intel trades at a discount compared to other software providers like Adobe with premium valuations, as well as other chip designers and manufacturers.
We think that the market is concerned about Intel’s competitive position and moat versus rivals like Nvidia (NVDA) and AMD (AMD). That skepticism is baked into Intel’s lower valuation multiples.
So, if Intel can capitalize on the AI boom in 2024 and improve profitability as we expect, a substantial valuation upside is possible. If they gain an edge in AI chips and foundry services, they could re-rate closer to peers.
Nvidia and AMD won’t give up their leadership without a fight. But if Intel executes well, its valuation has a lot more room to run than the hot multiples awarded to Nvidia and high-flying software vendors.