Investing

3 Hidden Semiconductor Stocks with AI Exposure and Massive Upside

Eric Bleeker

Published: July 4, 2024 4:11 pm

NVIDIA (NASDAQ: NVDA) has been at the center of the AI trend, but there are other hidden stocks in the semiconductor industry that investors would be wise to pay attention to. We analyze three under-the-radar semiconductor stocks that could see impressive returns from the incredible growth of AI data centers. These companies are: BE Semiconductor (OTC: BESIY), Applied Optoelectronics (AAOI) (NASDAQ: AAOI), and Credo Technology (CRDO).

3 Semiconductor Stocks That Could Boom Alongside the Growth of AI

You’ll find some key points discussed by 24/7 Wall Street Analysts Eric Bleeker and Austin Smith below:

• Everyone is talking about NVIDIA and they’re clearly the center of the trend surrounding AI.
• Yet, the semiconductor industry is huge with many ways to invest in the growth of AI. Let’s take a look at some “hidden” stocks that investors need to watch in the space. 
• The first company we’ll highlight is BE Semiconductor, or BESI. 
• The company trades in Europe, but it does have an OTC trading under BESIY with moderate volume.
• This is a Dutch company, an area that’s strong in semiconductors with companies like ASML (NASDAQ: ASML) and NXPI (NASDAQ: NXPI) also located in the Netherlands. 
• Year-over-year growth bottomed at -34% in the first quarter last year and was -26% in the third quarter. 
• Yet, BE Semi is now bouncing back with sales up 10% year-over-year last quarter, but profits were still down about 2% year-over-year. 
• One important aspect of AI is that it puts entirely new demands on chip packaging.
• For example, when chips like NVIDIA’s new B200 are made, they need to be packaged in very complex ways. That means stacks of memory on top of the B200 chip, that are directly connected by microscopic wires.
• If this sounds complex, it is! Complex packaging is important because BE Semiconductor is a leader in advanced packaging along with die attach and plating & cleaning. All areas that historically haven’t attracted a lot of attention but are now in focus thanks to the growth of artificial intelligence.
• Thanks in large part to the growth of AI, Besi is expected to see sales growth skyrocket to 43% next year. Which, is up from closer to 10% last quarter, so this take-off is going to be very rapid in the year ahead.
• If you’re looking to invest ahead of a very strong sales pipeline, Besi is a strong option.
• Next up, we’ll look at Applied Optoelectronics – which is ticker symbol AAOI.
• We need to emphasize that this is a pretty risky company, it’s tiny. Their market capitalization is little more than $300 million.
• The company has been treading water for years, in 2020 they had $234 million in sales, in 2023 that number was $217 million.
• What’s intriguing is Wall Street currently projects $272 million in sales this year.. Then 2025 gets even better, with projected sales currently at $448 million!
• If they actually delivered on that growth, investors could see massive returns. So, are Wall Street’s estimates believable?
• Well, AI data centers require higher bandwidth and Applied Optoelectronics makes 800G products that address this need. Further, the company says customers are fast-tracking orders for the back half of the year.
• So, it’s a niche AI infrastructure play that’s high-risk, but high reward. The company has disclosed Microsoft as a customer and says they could receive more than $300 million from the buildout of these advanced optics over the next several years. Is that enough to get them to the $448 million 2025 revenue estimate Wall Street has them at now? Maybe not, but it’s enough for a big step up in their revenue after years of stagnation and this is a very cheap stock selling for little more than one times this year’s sales.
• Finally, we end with Credo Technology – ticker symbol CRDO.
• This is another high-speed connectivity play, which trades for much more expensive multiples. It has a market cap of $5 billion and trailing sales of just $193 million.
• The other side of that pricey sales multiple is extreme growth potential, with estimates at 61% sales growth in 2025, and 50% in 2026.
• The company has taken off recently, so it might be one you add to a watchlist and if AI stocks sell off you buy on a potential dip. It’s very expensive right now, but that’s partially a reflection of investors realizing AI data centers are going to need a lot higher speed connections over time.

Transcript:

Eric, everyone is talking about NVIDIA, and they’re clearly the center of the trend surrounding AI, yet the semiconductor industry is huge, and there’s a number of ways to invest in the growth of AI that are not just NVIDIA.

Although they might be the biggest player, certainly the most public, we all know.

What are some of the hidden stocks that investors need to watch, particularly those who might be concerned that they’ve missed out on NVIDIA’s big run?

Yeah, NVIDIA is obviously commanding most of the attention right now, but the shift to AI accelerators has huge implications across the entire semiconductor supply chain.

We’re talking about basically ripping out trillions of dollars investment of a past kind of CPU-centric data center.

We’re moving forward to kind of a new model.

And when you do that, my favorite thing is trying to get ahead of a lot of the downstream names that are gonna benefit from these changes, because it’s a lot more than just NVIDIA.

So the first company I want to highlight is BE Semiconductor or BEZI.

The company trades in Europe, but does have an OTC trade that’s under the ticker BESIY.

It’s got moderate volume there, but you know, it is available to purchase by OTC.

This is a Dutch company, which is a geography that’s really strong in semiconductors as other companies like ASML and NXPI.

If you looked at the financials for BE Semi, you’d probably be wondering what investors are smoking paying 70 times earnings for this company.

Their year-over-year growth bottomed at negative 34% the first quarter last year.

It was negative 26% the third quarter.

It’s now bouncing back with sales up 10% last quarter, but profits were still down about 2% year-over-year.

The simple fact of the matter is AI puts new demands on how you package chips.

When chips like Nvidia’s new B200 are made, they need to be packaged in a very complex way.

We call it advanced packaging.

That means stacks of memory on top of the B200 chip that are directly connected by microscopic, basically, wires.

If this sounds complex, it is.

And BE Semiconductor is a leading company in this advanced packaging value chain that AI is rapidly accelerating.

So right now, this advanced packaging, you know, the stuff at the really leading edge, it’s a small part of their business, but it’s accelerating extremely rapid rate, hence the higher PE for the company.

In 2025, they’re expected to grow their top line at a 43% rate, which I mentioned earlier, that’s up from 9% last quarter.

So, you know, you’ve already had Nvidia take off.

This is a company whose takeoff is still happening as we speak today.

So if anyone’s looking for a company with a very strong sales pipeline, I would put Bezi in as a strong option.

Next up, I would look at Applied Opto Electronics.

Not a household name, but it’s ticker AAOI.

I need to emphasize this is a pretty risky company, Austin.

It’s tiny.

The market capitalization is just 331 million.

I can assure you this is truly hidden and off investors’ radars.

It’s been treading water for years.

If you looked at its trailing sales, you’d think this company was nothing special.

2020, they had sales of 234 million.

In 2023, that number is 217 million, i.e. it moved down across three years.

Now, here’s what’s intriguing.

Wall Street currently projects 272 million sales this year, and 448 million in 2025.

That’s an inflection point.

And if they actually delivered on that growth, investors would see massive returns.

There’s almost no question.

So is it believable?

Well, AI data centers, they require higher bandwidth and applied optoelectronics.

They make 800G products that address this need.

And they say their customers are fast tracking for the back half of the year.

That’s deliveries.

It’s a niche AI infrastructure play.

And once again, that makes a high risk, high reward.

But the company has disclosed Microsoft as a customer, and they say they can receive more than 300 million from the build out of these advanced optics over the next several years.

Is that enough to get them to the $448 million estimate Wall Street has them at?

Maybe not, but it’s enough for a big step up in revenue after years of stagnation.

And this is a very cheap stock selling for a little more than one time sales, which you can’t find that multiple on almost any AI stock.

So I think that’s an interesting one for investors.

Finally, would end it with credo technology that’s ticker symbol CRDO this is another high speed connectivity play on the other side though this one’s expensive trades for expensive multiples with a market cap of 5 billion trailing sales of just 193 million the other side of that valuation is extreme growth potential with estimates of 61 sales growth in 2025 50 in 2026 It’s taken off recently.

So, you know, this one, if I’m out there, I might add this.

And if AI stocks sell off, you could buy it on a potential dip.

It’s very expensive right now, but that’s partially a reflection on investors realizing AI data centers are going to need a lot higher speed connections over time.

So there you have it, Austin.

Three stocks running the gamut from tiny with huge catalysts to ones that are a little bit more expensive, but with huge growth markets.

Eric, thank you so much.

And just to recap for investors, because there was a lot in there, we’re looking at BE Semiconductor or BESI.

And then we’re looking at Applied Optoelectronics, which is ticker symbol AAOI.

And then Credo Technology, ticker symbol CRDO.

And as you’ve long advised investors, finding the smaller second derivative under the radar plays out of ways to get really outsize hundreds, thousands of percent returns, but they are not without their risk.

So if investors are considering these positions today, maybe look for a market pullback to make your strike price or Position size accordingly.

Please don’t put your entire portfolio in these stocks, but an amount of money that you can afford to lose.

But hey, at these levels and with all the trends we’re seeing in AI and all the investment dollars floating around and the essential roles that these three companies could play in advancing this technology, there could be some pretty substantial returns for investors.