The artificial intelligence (AI) revolution wouldn't be possible without semiconductors. They fill the data centers that developers use to build AI models, and they power the computers and devices we use to access the technology.
Picking the winners and losers in the semiconductor space won't be easy because the pace of innovation is staggering. Nvidia had a market capitalization of $360 billion at the start of 2023, and less than two years later, it now stands at a whopping $3 trillion! The company dominates the AI chip space right now, but that doesn't mean it will forever.
Therefore, rather than buying individual stocks, investors might want to look at the iShares Semiconductor ETF(NASDAQ: SOXX) instead. It holds every major AI chip stock you could want to own, and consistently crushes the return of the S&P 500 index.
In fact, here's how it could turn an investment of $200,000 into $1 million over the long term -- but don't worry, investors with any starting balance can earn a fivefold return from here if this scenario plays out.
Image source: Getty Images.
Every leading AI chip stock in one place
The iShares Semiconductor ETF aims to give investors exposure to U.S. companies that design, manufacture, and distribute chips, but it's especially focused on those that will benefit from the rise of AI.
The ETF only holds 30 different stocks, and its top five positions account for 37.5% of the total value of its entire portfolio. In other words, it's highly concentrated:
Stock
iShares ETF Portfolio Weighting
1. Broadcom
8.72%
2. Advanced Micro Devices
8.67%
3. Nvidia
8.00%
4. Texas Instruments
6.10%
5. Qualcomm
6.07%
Data source: iShares. Portfolio weightings are accurate as of Sept. 23, 2024, and are subject to change.
Broadcom has a booming semiconductor business, which produces specialized data center chips called AI accelerators. Plus, it makes data center networking equipment like switches that regulate how fast data travels from one point to another. In the recent third quarter of fiscal 2024 (ended Aug. 4), Broadcom said its AI accelerator segment grew by three-and-a-half times year over year, and sales of its Tomahawk 5 and Jericho3-AI switches saw fourfold growth.
Advanced Micro Devices (AMD) is trying to catch up to Nvidia in the market for data center graphics processors (GPUs), and it's having some success thanks to its new MI300 chips. However, the company's Ryzen AI chips have taken a leadership position in the personal computing market, where Nvidia doesn't operate. They facilitate on-device AI processing, circumventing data centers to create a faster user experience. Ryzen AI hardware can be found in millions of computers already, from manufacturers like HP, Asus, and Lenovo.
As mentioned, Nvidia has created an incredible amount of value since last year. The company's data center GPUs are the best in the industry for developing AI models, and it simply can't keep up with demand. Nvidia is preparing to ship a new generation of GPUs based on its Blackwell architecture later this year, which could deliver a staggering performance increase of up to 30 times compared to its flagship H100 GPU.
Beyond its top five positions, the iShares ETF also holds a number of other important AI semiconductor stocks. They include Micron Technology, which is a leader in memory and storage chips, and Taiwan Semiconductor Manufacturing, which fabricates many of the chips designed by Nvidia and AMD.
Turning $200,000 into $1 million
The iShares ETF has delivered a compound annual return of 12.05% since its inception in 2001, comfortably beating the average annual gain of 8.23% in the S&P 500 over the same period.
However, demand for chips has exploded in recent years thanks to the rapid adoption of technologies like cloud computing, enterprise software, and AI. As a result, the ETF has soared by an average of 25.4% annually over the last decade, trouncing the 13.2% annual return in the S&P 500 over that same stretch of time.
The table shows how long it could take the iShares ETF to turn a $200,000 investment into $1 million based on three potential scenarios:
Scenario 1: The ETF delivers an average annual return of 12.05% going forward, in line with its average since 2001.
Scenario 2: The ETF delivers an annual return of 18.7% going forward (the midpoint of scenarios 1 and 3).
Scenario 3: The ETF delivers an annual return of 25.4% going forward, in line with its 10-year average.
Starting Balance
Compound Annual Return
Time to Reach $1 Million
$200,000
12.05%
15 years
$200,000
18.7% (midpoint)
10 years
$200,000
25.4%
Eight years
Calculations by author.
The ETF could deliver a fivefold return over the next 15 years even if it reverts to its long-term average annual gain of 12.05%. But we are still in the early stages of the AI revolution, so its performance is likely to be much better, at least in the foreseeable future. Nvidia CEO Jensen Huang says $1 trillion could be spent on data center infrastructure over the next five years alone, which will be a powerful tailwind for many of the stocks in the iShares ETF.
Plus, PwC thinks AI will add $15.7 trillion to the global economy as a whole by 2030, so companies will have to invest heavily in AI data centers, computers, and devices if they want to capture that value.
On the flip side, the iShares ETF will likely suffer a period of underperformance if AI fails to live up to the hype. As I mentioned, the fund is highly concentrated, so investors should only buy it as part of a balanced portfolio of other stocks or ETFs.
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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, HP, Nvidia, Qualcomm, Taiwan Semiconductor Manufacturing, Texas Instruments, and iShares Trust-iShares Semiconductor ETF. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.