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Many investors gravitate toward Nvidia as their top artificial intelligence (AI) stock. After all, it's the world's leading producer of data center GPUs for processing complex AI tasks, and most of the world's leading AI software companies need to keep accumulating more of its chips to support their growing AI applications.
However, investors shouldn't assume that Nvidia is the only AI stock to buy and hold to profit from the expansion of the AI market over the next decade. Here are two other reliable long-term plays on that secular trend: the chip designer Arm Holdings (NASDAQ: ARM) and the computer vision chipmaker Ambarella (NASDAQ: AMBA).
1. Arm Holdings
Arm Holdings designs most of the world's mobile chips, but doesn't manufacture any chips of its own. Instead, it licenses its power-efficient designs to fabless chipmakers like Qualcomm, Apple, and MediaTek. Arm's architecture is more power-efficient than the x86 architecture used by Intel and AMD, so it's better suited for mobile devices, cars, Internet of Things (IoT) gadgets, and other cloud-based devices.
Arm's revenue grew 33% in fiscal 2022 (which ended in March 2022) as more 5G devices hit the market, but dropped 1% in fiscal 2023 as that upgrade cycle ended. In fiscal 2024, the company's revenue jumped 21% as the smartphone market stabilized, customers developed more auto and cloud chips, and it licensed more AI-oriented chip designs.
Arm generates most of its revenue from royalties and licensing fees. The company's recent growth was largely driven by the market's robust demand for its AI-optimized Armv9 designs across the smartphone, cloud, and auto markets. Those designs generate much higher royalties than its non-AI chip designs. For fiscal 2025, Arm expects revenue to rise 22% to 25% as its adjusted EPS grows 23% to 29%.
From fiscal 2024 to fiscal 2027, analysts expect Arm's revenue and EPS to grow at a compound annual growth rate (CAGR) of 23% and 83%, respectively, as the company rolls out more power-efficient AI chip designs and extends its reach beyond the smartphone market. Arm's stock might not seem cheap at 82 times forward earnings, but it could have plenty of room to expand and evolve over the next 10 years.
2. Ambarella
Ambarella produces image processing system-on-chips (SoCs) and computer vision chips for security cameras, dash cams, drones, and other connected devices. Its chips enable those cameras to quickly process high-quality photos and videos.
Ambarella faced some major challenges over the past few years. U.S. regulators blocked it from selling its SoCs to Chinese security camera makers, its IoT and automotive chip sales cooled in a challenging macro environment, and the company faced tougher competition from other computer vision chipmakers like Mobileye and Qualcomm.