Wall Street is buzzing with excitement about artificial intelligence. At the center is Nvidia, which designs and sells graphics processing unit (GPU) chips for data centers and continues to power AI applications. The blowout earnings it reported in late May came on top of huge forecasts fueled by strong demand for AI chips and sparked a buying wave for the stock. But Jordan Cvetanovski, chief investment officer and portfolio manager at Pella Funds Management, told CNBC Pro this week that he wouldn’t buy Nvidia because it’s too expensive right now. Instead, he would buy Taiwan’s TSMC and Dutch company ASML. Both have to do with Nvidia’s performance: The US chipmaker relies on TSMC to make its GPUs. In turn, TSMC uses machines made by ASML to manufacture the most advanced semiconductors. Why Nvidia is a “Bad Investment” Cvetanovski said Nvidia will likely take a large part of the initial wave of investments in the data center GPU stack, relying on an extremely bullish outlook for the sector. “However, there are already other players with GPU alternatives, and some big tech companies like Apple have been investing in their own solutions. The point is that competition for GPUs will eventually increase, and Nvidia will enjoy less profit and revenue share,” He said. Investors will be paying more than 40 times EBITDA (earnings before interest, tax, depreciation and amortization) by the end of the year, with the market expecting growth of around 20% over the next decade, Cvetanovski said. “It’s a high valuation, and even the smallest dip is minimal,” he said. “AI is a great story, Nvidia is a great story, but because of its valuation, it’s a bad investment.” Cvetanovski said ASML and TSMC While both ASML and TSMC will benefit from AI, one of them will benefit from artificial intelligence. advantage over the other. “So, we think Nvidia has already priced in a lot of the positives, but we think buying TSMC and ASML is actually a better way to — given the difference in valuations, and the different potential there, it can now be leveraged to invest in that field,” said Tsvetanovsky. TSMC, he said, offers more diversified opportunities for “the general advancement of technology around the world.” “TSMC is arguably a great story, with a high valuation, and it’s a very strong investment for us. Even before Nvidia’s upgrade, TSMC’s stock price was cheap, and its EBIT margin was almost the same as Same with Nvidia, which is expected to grow in the high teens compared to Nvidia. $20s higher, but a fraction of the valuation,” he said, adding that even now it’s still cheap. “In the long run, TSMC won’t care which GPU wins because it will supply all GPU suppliers,” he added. Both TSMC and ASML have become monopolies in their respective fields, he said: TSMC in cutting-edge chips — “they’re the only ones that can really mass-produce” — and ASML in extreme ultraviolet lithography (EUV) machines, in its Own 100% market share. Cvetanovski described ASML as “the cornerstone of all technology.” “The whole technological advancement depends on them,” he said, referring to its EUV machines. “ASML is not going to abuse its monopoly position, nor is it dominating through price, but its order intake is sure to grow and be stable over time. Although it is doing well, relative to its name recognition, in Valuations and growth potential on an FCF basis remain modest,” he said. However, if he had to pick a stock, he would give TSMC more upside — around 30% above today’s price — while he thinks ASML’s valuation is already fair. “TSMC is a better investment in terms of returns. We think it is cheaper than ASML and offers better return potential, assuming no risk from any negative events,” Cvetanovski said. “However, we believe that while TSMC is a leader in what they do, ASML is one of the best companies in the world — without ASML there would be no TSMC, without TSMC there would be no Apple, without Apple there would be no iPhone. On average, analysts covering TSMC and ASML see an upside of around 10% for each, according to FactSet data.
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