AI Chip Arms Race: 3 Must-Watch Equipment Stocks

Key Points

• ASML is the sole supplier of EUV lithography systems, which are essential for producing the advanced chips that power AI accelerators.
• Applied Materials provides critical deposition and etch technologies used in manufacturing AI chips, DRAM, and NAND memory for data centers.
• KLA’s inspection and metrology tools improve chip yields, helping semiconductor manufacturers maximize efficiency and protect profit margins.

If it wasn't already clear to investors, the demand for data centers will be a catalyst for semiconductor stocks for years, if not decades. It's why investors continue to buy into the growth of chip makers like NVIDIA Corp. NASDAQ: NVDA. The company's graphic processing units (GPUs) command over 80% of the current market.

Another profitable way to invest in the demand for data centers is through a group of technology stocks with the advanced technology needed to meet the demands caused by artificial intelligence (AI). For example:

• Generative AI workloads (training massive models) require cutting-edge GPUs and specialized accelerators, which are only made on the most advanced nodes.

• Memory density and packaging innovation (HBM, advanced substrates) also depend on precision manufacturing equipment.

These are just two reasons hyperscale data centers are rapidly upgrading to newer, more power-efficient chips. Chipmakers like NVIDIA and Advanced Micro Devices Inc. NASDAQ: AMD simply can't do without this new technology. Here are three companies on the leading edge of the semiconductor supply chain that are set up for significant gains.

The Best Pure Play on AI Chip Demand

First up is ASML NASDAQ: ASML. The company is the leader in extreme ultraviolet (EUV) lithography systems. EUV prints tiny circuit patterns onto silicon wafers using light with an extremely short wavelength to achieve fine resolution.

This is an advantage over deep ultraviolet (DUV) technology, which cannot produce the 5nm, 3nm, or 2nm transistors that today's cutting-edge AI accelerators require without adding several complex (and costly) steps. That means chipmakers can't produce the advanced chips their customers require without EUV technology.

That's one reason ASML posted 52% year-over-year revenue growth in its most recent quarter, and it's also why investors can expect more of the same in future quarters.

Since hitting an all-time high in July 2024, ASML stock dropped sharply. But that's likely to give investors a second chance to get in. Analysts give ASML a consensus price target of $923.80, a gain of more than 16%. Plus, despite trading around 33x earnings, ASML is trading at a discount to its historical averages.

Applied Materials Has Exposure Beyond Just AI Chips

Applied Materials Inc. NASDAQ: AMAT is another link in the chip-making supply chain. Specifically, the company provides key process technologies such as thin film deposition, etch, and chemical-mechanical planarization. These are needed to build high-performance AI chips with high-bandwidth memory (HBM) used in data center GPUs.

Applied Materials has a customer base that goes beyond leading-edge logic chips. Its technology is also necessary for Dynamic Random-Access Memory (DRAM) applications like PCs, servers, and smartphones and NAND flash memory, which is needed in applications like cloud storage.

This gives the company a large addressable market. But is that enough to overcome a valuation that is starting to look stretched at around 21x earnings? Analysts from Wells Fargo & Co. NYSE: WFC and Citigroup Inc. NYSE: C have raised their price targets. The belief is that revenue growth, which is expected to grow 6.5% to $29 billion in 2025, will accelerate sharply in the next five years.

That makes AMAT stock a good buy-and-hold candidate. This is particularly true with the stock trading about 20% below its all-time high in 2024.

KLA's Role in Preventing Costly Chip Defects

The last stock on this list is KLA NASDAQ: KLAC. The company is a leader in yield management. Here's why that's important for the ongoing data center buildout. As chips become more complex, it's vital that each wafer produces (i.e., yields) as many usable chips as possible.

This is where KLA comes in. Its inspection and measurement tools detect and correct microscopic defects early in the process. This helps manufacturers improve efficiency, which protects their margins and makes KLA an invaluable partner.

Unlike the first two stocks on this list, KLAC stock has recently made an ATH. This puts the stock currently above the consensus price target of analysts, pushing its P/E ratio above historical levels and the sector average.

Several analysts have been raising their price targets in the last few weeks. That suggests an expectation that KLA will report strong earnings when it reports in late July.