Semiconductor maker and stock market darling Nvidia has enjoyed quite a run in recent years, riding the wave of growing interest in cryptocurrencies and then the emergence of artificial intelligence (AI). A $1,000 investment just five years ago would have grown to over $30,000 by July 2024. Not surprisingly, investors have been focused on finding the stocks that could become the next Nvidia.
A good place to start is to look for companies that can capitalize on the growing interest and investment in AI, or other highly scalable companies riding a similar trend that has been going on for decades.
5 hot stocks on the tech wave
Nvidia is now one of the select group of the most valuable companies in the world, but the stocks listed below don’t have to get that big for investors to enjoy strong returns over the years. (Data below, as of August 27, 2024)
Broadcom (AVGO)
Broadcom is the largest stock on this list, and yet it’s only a quarter the size of Nvidia. The semiconductor company produces application-specific integrated circuits (ASICs) designed to perform specific tasks. ASICs are useful in AI applications, and Broadcom is a proven leader in this growing market space.
The company’s customers already include many of the largest technology companies, including Alphabet and Meta Platforms, and analysts expect strong growth in the coming years.
Market capitalization: 753 billion US dollars
Super Microcomputer (SMCI)
Super Micro Computer has been one of the strongest tech stocks lately, and while it’s fallen significantly since its early 2024 peak, the stock is still relatively cheaply valued at $36 billion (compared to Nvidia). The company builds servers and storage for cloud data centers, including AI servers, using chips from leading companies like Nvidia. The company is poised to gain market share.
While revenue grew strongly in the fiscal year ending in June 2024 – up 110 percent year over year – it rose even faster in the most recent quarter, by 143 percent. Revenue could double again next year if management’s forecast is correct. All good news, but the biggest blow to the company is its high double-digit gross margin, which means the company won’t scale as well as a well-run software company. But the strong revenue growth makes it easier to overlook for now.
Market capitalization: 32 billion US dollars
Advanced Micro Devices (AMD)
AMD has been on the rise for some time, with rival chipmaker Intel hot on its heels. AMD’s graphics cards can compete well with Nvidia’s and the company has been gaining market share in recent years. That has led to a sharp rise in its share price, but AMD is still only a fraction of the size of giant Nvidia, less than 8 percent to be exact.
While AMD may never get that big, demand for computing power is expected to continue to rise sharply for years to come, not only because of artificial intelligence, but also because of the increasing pervasiveness of entertainment and media in our lives. This megatrend means there’s plenty of room for innovative chip companies to thrive.
Market capitalization: 243 billion US dollars
Snowflake (snow)
Around 400 million terabytes of data are produced every day, according to various sources, and Snowflake helps companies make sense of these volumes of data with its cloud data platform. The amount of data will only continue to grow as our world is in the midst of computerization, an ongoing megatrend. In the quarter ended July 31, 2024, the company increased its revenue by 29 percent year-over-year. And more importantly, its customers have signed up for even more services, so they’re happy with what they get.
Legendary investor Warren Buffett recently sold his small stake in Snowflake, but that doesn’t mean the cloud data business won’t be successful in the future. The company already counts nearly 37 percent of Forbes Global 2000 companies among its customers, so there seems to be room for improvement.
Market capitalization: 39 billion US dollars
Crowdstrike (CRWD)
You may remember Crowdstrike because it recently appeared in the news, but not for the reason you might want. The cybersecurity company was at the center of a real mess when an update to its security software caused massive disruptions around the world, including airlines. Ironically, however, this incident shows just how important Crowstrike is to our computerized world.
The company has experienced strong growth over time, and cybersecurity will only become more important as time goes on, as demonstrated by a data breach that exposed virtually all Americans’ Social Security numbers. Crowdstrike is a proven leader in the space, and its software benefits from a network effect where emerging threats can be neutralized, the solution built into the software, and then quickly shared with other customers, helping to increase each customer’s future immunity.
Market capitalization: 65 billion US dollars
Should you consider buying these hot tech stocks?
The advantage of buying individual stocks is that you can get a lot more than you would with an index fund, even if it focuses on a hot sector like semiconductors or information technology. It’s simple math. If you can identify the companies that are driving the average up, they will do better than the average, which in turn represents the performance of the index. The trick is finding them.
Many hot stocks can perform well over long periods of time, and it’s not uncommon for the best stocks to return 25 to 30 percent annually, even for decades. That beats the strong returns of top index funds like Vanguard S&P 500 ETF (VOO) and the Nasdaq-tracking Invesco QQQ Trust (QQQ), which returned 15.6 percent and 21.2 percent annually, respectively, over the past five years.
The downside to buying individual stocks, however, is that it takes extensive research and observation to keep up with them and the competition. The competitive landscape changes quickly, especially in the technology world, so if you’re not a tech expert, you can quickly get left behind. What was once the wave of the future is now just a small ripple as the industry tides change again.
However, investors can still earn attractive returns without the concentrated risks of individual stocks and without too much research. Thematic exchange-traded funds (ETFs) can be an attractive and cost-effective way to build a diversified portfolio and generate high returns.
For example, the best technology ETFs have delivered compelling annual returns over the past five years:
- iShares Semiconductor ETF (SOXX): 28.3 percent
- Vanguard Information Technology ETF (VGT): 22.6 percent
- iShares Expanded Tech Software Sector ETF (IGV): 14.8 percent
Finding funds with a strong long-term track record can be a much simpler process than doing the necessary work on dozens of stocks yourself. And you’ll still be invested in some of the hottest stocks, with the added security of diversification. High returns, low costs, and less work—that’s why both new and experienced investors turn to sector ETFs like the ones above.
Conclusion
Looking for the next Nvidia could be worthwhile, because if you get it right, you have the prospect of decades of strong returns. But investors can also do well by buying index funds that hold some of the best tech stocks, adding to their positions regularly over time, and then holding them.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making any investment decision. Investors are also advised that past performance of investment products is no guarantee of future performance.
