Three Stocks of Ai ‘Enablers’ to Consider as Nvidia Sets Up Another Surprise

Nvidia Corp. is in the spotlight as it gears up to unveil its latest quarterly results, particularly given its dominant position in the graphics processing units (GPUs) market crucial for the implementation of artificial intelligence (AI) technology in datacenters. Ken Laudan, the portfolio manager of the Buffalo Large Cap Fund (BUFEX BUIEX), anticipates that the coming year will continue to be shaped by "AI enablers." While Nvidia remains a significant holding in the Buffalo Large Cap Fund, Laudan suggests exploring additional investment opportunities in network communications, data storage, and power management to ride the AI wave.

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The Buffalo Large Cap Fund, holding a four-star rating within Morningstar’s “Large Growth” fund category, has exhibited strong performance, ranking in the top 15% among 1,119 funds over the past three years. Nvidia, as of December 31, constituted the fund’s fifth-largest holding, comprising 4.6% of the portfolio.

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Before delving into Laudan’s three recommended stock picks, it is essential to consider the latest estimates for Nvidia. Sales of the company's GPUs soared in the middle of the previous year, leading to staggering year-over-year growth. However, analysts predict a slowdown in sequential growth for the upcoming quarterly report. While quarterly sales are expected to triple compared to a year earlier, the anticipated increase is a more modest 13% from the previous quarter, indicating a deceleration from the growth rates observed in the preceding three quarters.

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In an interview with MarketWatch, Laudan expressed his anticipation of another outstanding quarter from Nvidia, surpassing consensus estimates. He highlighted the persistent demand for GPUs, even among hyperscalers in datacenter operations.

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While acknowledging renowned AI enablers like Nvidia, Taiwan Semiconductor Manufacturing Co., Microsoft, Amazon.com, and Alphabet, Laudan foresees a shift in investor focus towards "AI adapters" around 2025. These are described as software-centric companies offering AI large-language models alongside their enterprise or vertical software stocks. Examples include Adobe, ServiceNow, Salesforce, MongoDB, Snowflake, and potentially S&P Global.

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For the present, Laudan recommends familiarizing investors with three additional AI enablers held by the Buffalo Large Cap Fund:

1. Coherent Corp. (COHR): Coherent utilizes optical fibers, made from silicon carbide material, to manufacture components for devices requiring resistance to extreme temperatures. Holding a 60% global market share for optical transceivers, Coherent's products play a crucial role in improving data transmission among AI servers. Laudan estimates a total addressable market (TAM) for optical transceivers of approximately $1 billion in 2023, with expectations of expansion to $6.5 or $7 billion by 2027.
2. Pure Storage Inc. (PSTG): Despite the widespread acknowledgment of the benefits of flash storage over traditional hard drives, approximately 90% of cloud data is stored on spinning hard disk drives. Pure Storage introduced its FlashBlade//E product, a flash storage array designed for commercial use and priced similarly to spinning hard drives on a gigabyte basis. With increasing storage capacities planned for the future, Laudan sees this product as a catalyst for Pure Storage's "storage-as-a-service" offering, potentially lowering datacenters' storage costs.
3. Eaton Corp. PLC (ETN): Eaton Electric provides power management components essential for datacenters, vehicles, aircraft, and machinery. With the exponential demand for electricity fueled by AI's raw processing power requirements, Eaton stands to benefit significantly. Laudan describes Eaton as a major player in the power management space, likening it to a U.S. counterpart to Schneider Electric SE, a prominent French company specializing in similar products.

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As AI continues to reshape industries, Laudan's diversified approach to AI investments encompasses not only GPU manufacturers like Nvidia but also companies contributing to network infrastructure, data storage, and power management, offering investors a comprehensive strategy to capitalize on the evolving landscape of artificial intelligence.

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