- There's more to the stock market's AI trade than just buying Nvidia, according to Bank of America.
- The bank highlighted three second-tier winners that should benefit from the growing adoption of AI.
- "Rising tide could create profitable niche for next tier of vendors," Bank of America said.
While the stock market's artificial intelligence trade has wildly benefitted chipmakers like Nvidia and Broadcom, there is a secondary tier winners that should see further upside, according to Bank of America.
"Rising tide could create profitable niche for next tier of vendors," Bank of America's Vivek Arya said in a note on Sunday.
Arya observed that the accelerator market, which enables the complex inner workings of generative AI chatbots, should double over the next three years to about $200 billion.
The rapid growth in that market "could create volatile but fruitful opportunities among the #2 vendors," Arya said.
"Each 'junior samurAI' trades interestingly at a valuation premium to its respective leader, so greater stock volatility is to be expected. However, as the leader expands the market TAM, the junior can likely continue to carve a profitable niche," Arya said.
There are three "Buy" rated stocks that Arya believes will benefit from the growing adoption of AI.
1. Marvell Technology
Marvell Technology offers data infrastructure-focused semiconductor solutions and helps tech companies build custom chips. The company should offer more details about its AI strategy at its upcoming analyst day on April 11.
Arya thinks the analyst day will be a positive catalyst for the stock, as he expects the company will guide for about 10% long-term share of the $20 to $30 billion custom AI chip market, which would be well above consensus estimates of less than 5% share.
Arya said Micron could also highlight its AI Ethernet switching business, which is a market that could double to as much as $7 billion by 2027. Marvell currently has a 5% share in the market.
"MRVL's execution has been spotty the last few quarters but our recent meeting suggests potential for legacy roughing near-term," Arya said.
Bank of America reiterated its $95 price target, representing potential upside of 30%.
2. Micron
High-bandwidth memory is essential for the growing adoption of AI, and it's creating a dynamic that has never happened in the memory market. That's great news for memory-chip producer Micron.
"Usually new memory demand cycles are met with a supply response, leading inevitably to inventory and price pressure. High-bandwidth memory, critical to AI, is perhaps the first memory technology that is rapidly eating into the supply, consuming 3x the amount of wafer vs. traditional DDR DRAM memory," Arya said.
Arya estimated that the high-bandwidth memory market will grow at a 48% compounded annual growth rate through 2027 to more than $20 billion.
"Memory industry also stands to benefit as AI expands to the edge, via higher-spec'd smartphones, PCs and other smart/connected devices," Arya said.
Bank of America raised Micron's price target to $144 from $120, representing potential upside of 15%.
3. AMD
AMD's consistency in execution gives Arya confidence that it can maintain a 5% to 10% share in the AI accelerator market that Nvidia dominates.
"This is lower than the 20% share opportunity some bulls would argue for, but we argue AMD is being flanked on 3 sides - from leader NVDA with its incumbency/scale and well-priced Blackwell products, from custom chips with their lower-price/higher optimization, and from multiple start-ups going after market niches," Arya said.
Still, while AMD is playing catch up in the AI market, "we expect it to leverage its chiplet architecture to move faster to the 3nm node for CY26 AI products," Arya said.
Bank of America reiterated its $195 price target, representing potential upside of 7%.
