All eyes are on Nvidia Corp this week. – The company will report its latest quarterly results after the market closes on Wednesday. It dominates the market for graphics processing units (GPUs), which are used by data centers to adopt artificial intelligence technology.
However, Ken Laudan, portfolio manager of the Buffalo Large Cap Fund BUFEX BUIEX, suggests three stocks of companies operating in network communications, data storage and Energy management companies are more stocks to consider as opportunities to ride the wave.
The Buffalo Large Cap Fund is rated four stars (out of five) in the Morningstar Large Growth fund category and ranks in the top 15% of 1,119 funds with three-year performance. Nvidia NVDA was the fund's fifth-largest holding as of Dec. 31, accounting for 4.6% of the portfolio.
Before we look at Laudan's three other stock picks, let's take a look at the estimates for Nvidia, which were updated on Monday morning. Sales of the company's GPUs surged in the middle of last year, so a year-over-year comparison of quarterly numbers is expected to be staggering. However, brokerage firm analysts surveyed by FactSet expect Nvidia's sequential growth to slow. Here are estimates for Wednesday's report with sales figures in the billions.
| Estimate for the quarter ending January 29, 2024 | The quarter ended on October 29, 2023 | The quarter ended on July 30, 2023 | The quarter ended on April 30, 2023 | The quarter ended on January 29, 2023 | |
| Sales | $20,395 | $18,120 | $13,507 | $7,192 | $6,051 |
| Change compared to the same quarter of the previous year | 237% | 206% | 101% | -13% | -21% |
| Change from previous quarter | 13% | 34% | 88% | 19% | 2% |
| Earnings per share | $4.59 | $3.71 | $2.48 | $0.82 | $0.57 |
| Change compared to the same quarter of the previous year | 705% | 1262% | 850% | 29% | -52% |
| Change from previous quarter | 24% | 50% | 202% | 44% | 110% |
| Source: FactSet | |||||
Nvidia's quarterly revenue is expected to triple year-over-year, but increase “only” 13% quarter-over-quarter. That would be a slowdown from the sequential growth rates of the previous three quarters.
During an interview with MarketWatch, Laudan said he expects Nvidia to have another blowout quarter with numbers well above consensus estimates because “even hyperscalers.” [among datacenter operators] buy all the GPUs they can get.”
Nvidia stock is up 240% in the past year, so it's no surprise that there are warnings for investors:
Three other AI stocks dominate as “enablers”.
When Laudan talked about “AI enablers,” he cited familiar names as examples, including Nvidia and Taiwan Semiconductor Manufacturing Co. TSM, as well as the big three cloud service providers – Microsoft Corp. MSFT, Amazon.com Inc. AMZN and Alphabet Inc. GOOGL.
He said that at some point (perhaps in 2025), investors will pay more attention to “AI adapters,” which he described as “software-centric companies that sell an AI model in large languages in addition to their enterprise or vertical software inventory.” Customers.” As examples, Laudan cited the “usual suspects,” including Adobe Inc. ADBE, ServiceNow Inc. NOW, Salesforce Inc. CRM, MongoDB Inc. MDB and Snowflake Inc. SNOW, adding: “You could even have S&P there Deploy SPGI globally.”
However, he suggested that investors familiarize themselves with three other Buffalo Large Cap Fund AI enablers for now:
Coherent
Coherent Corp.
COHR uses silicon carbide optical fibers to produce various components of devices that must withstand extreme temperatures. This may include parts used in vehicles and aircraft. But Laudan said he is holding shares in Coherent to advance the expansion of AI.
According to Laudan, Coherent has a 60% global market share in optical transceivers.
“You plug one of these transceivers into a router or network switch in a data center and it converts the network into optical signals,” he said. He described the transceivers as “a key factor in improving data transfer between AI servers” in the next few years.
Laudan estimated that the total addressable market (TAM) for optical transceivers was about $1 billion in 2023 and said Coherent expects the TAM to grow to $6.5 billion to $7 billion by 2027.
Pure storage
While most computer users would probably agree that it would be better to rely on flash storage rather than hard drives with moving parts, Laudan said, “About 90% of the data in the cloud is stored on spinning hard drives.”
“Pure Storage Inc. PSTG last year launched its FlashBlade//E product – a commercial-grade flash storage array – that is priced the same as spinning disks on a per-gigabyte basis,” said Laudan. This means the total cost of ownership is lower than spinning hard drives because of flash memory's longer shelf life, he said.
“The e-product is a 75 terabyte product. They will launch a 150 this year and a 350 in 2025. So this will bring the price down even further,” he said.
Laudan said data centers are already using the FlashBlade//E, which he described as a “door opener” for Pure Storage's “storage-as-a-service.” It is a consumption-based subscription service that would improve the company's revenue stream while potentially reducing data center storage costs even further, he said.
Eaton Electric
Eaton Corp. PLC ETN offers energy management components for data centers, aircraft, cars, trucks and machines. These include generators, transformers, switches, cooling systems and battery storage.
Because AI requires so much pure computing power, data centers will cause a “logarithmic” expansion in electricity demand, meaning a greater need for energy management, Laudan said.
He said Eaton is one of the top five players in the space and is also a major supplier of equipment for electric vehicle charging and the aerospace industry. He described the company as a “US version” of Schneider Electric SE SU, based in France.
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