Nvidia (NVDA -0.36%) has owned the stock market spotlight in 2024, which isn't surprising given its 145% year-to-date gain. For a brief moment in June, it even became the most valuable company in the world when its market cap eclipsed $3.4 trillion.
It's unlikely Nvidia stock will deliver a comparable gain in the second half of this year, purely because of its sheer size and its valuation relative to its earnings. For that reason, investors might be better off looking at other stocks to drive their portfolios forward.
Axcelis Technologies (ACLS 1.99%) is a critical service provider to the semiconductor industry. Its stock has soared 800% over the last five years, yet it's still incredibly cheap compared to its peers. Management is forecasting a strong second half of 2024, so here's why it could be the ideal stock to buy right now.
Axcelis will benefit from artificial intelligence
Nvidia designs powerful graphics processing chips (GPUs) that have multiple applications, including being used in data centers that help developers build, train, and deploy artificial intelligence (AI) models. Axcelis plays in a different space, manufacturing ion implantation equipment that is critical to the fabrication of processors (CPUs), memory (DRAM) chips, and storage (NAND) chips.
AI workloads require lots of capacity from all three of these chip types. For instance, all data center GPUs designed by Nvidia have built-in memory, and some of the more advanced GPUs like the new Blackwell-based GB200 are also fitted with CPUs to boost efficiency. Then there is the fact that AI applications are transitioning out of just being used in data centers and are making their way into devices, from computers to smartphones, which require significantly more processing power, memory, and storage.
Micron Technology says next-generation AI computers will require up to 80% more DRAM capacity than traditional computers, and AI-enabled smartphones could require twice as much as their predecessors.
Axcelis CEO Russell Lowe recently highlighted that very shift as a potential source of future demand. He said AI will require significant manufacturing capacity expansions across the semiconductor industry, and that should translate to more equipment sales for Axcelis.
Axcelis is preparing for its revenue growth to reaccelerate
Axcelis generated $252 million in revenue during the recent first quarter of 2024 (ended March 31), which was a 6.5% drop from the year-ago period. That wasn't an ideal result, but the company is coming off an incredible run of growth with revenue increasing by 23% in 2023 (to a record $1.13 billion), and 39% in 2022.
The semiconductor industry is cyclical, especially in segments like computers and devices where consumers and businesses might only upgrade once every couple of years. That's part of the reason Axcelis' growth took a pause in the early stages of 2024, but it's expected to be temporary. Management says revenue should increase in the second half of the year compared to the first half.
Plus, Axcelis is already guiding for revenue to hit a new record of $1.3 billion in 2025. Not to mention, the company still has a sizable order backlog worth $1.1 billion, so there is plenty of work in the pipeline in the meantime.
Image source: Getty Images.
Axcelis is dirt cheap compared to other chip stocks
Axcelis stock is up just 9% in 2024 because of its revenue slowdown in the early stages of the year. But it's up 800% over the last five years, yet it remains cheap. Based on its trailing-12-month earnings per share of $7.57 and its current stock price of $135.59, it trades at a price-to-earnings (P/E) ratio of just 17.9.
That's a big discount to the iShares Semiconductor ETF, which trades at a P/E ratio of 36.9. The ETF holds every major chip stock including Nvidia, so it's a great benchmark for the industry. But taking a broader view, Axcelis stock is also much cheaper than the S&P 500 index, which trades at a P/E ratio of 24.
The AI opportunity is enormous. Advanced Micro Devices says millions of personal computers fitted with its AI chips have already shipped, from leading manufacturers like Dell Technologies and HP. Microsoft also just revealed an AI computer of its own, called Copilot+.
Plus, Apple is gearing up to launch its iPhone 16 later this year, which should feature a powerful new chipset to run its AI-centric iOS 18 operating system. It also plans AI-related upgrades to its computers and tablets.
The point is, this trend is only warming up, and there's every chance Axcelis' order backlog grows in the coming years as chipmakers race to fill AI demand from all of those new sources outside the data center. Through that lens, Axcelis stock looks like an absolute bargain at the current price.
