Artificial intelligence (AI) is changing the world at an incredible pace, and its earthshaking impacts are still just beginning to unfold. The rapid evolution of this new category of software is poised to influence nearly every industry imaginable, and is being made possible by advanced semiconductors.

Most notably, the rise of AI has powered incredible stock gains for Nvidia — the leading designer of graphics processing units (GPUs) used to run AI software. But some promising players in the AI semiconductor space are trading at massive discounts compared to previous highs.

With that in mind, read on to see why two Fool.com contributors believe that investing in these beaten-down chip stocks will allow you to bank big profits from the rise of AI.

Intel is a smart turnaround play

Keith Noonan: No doubt about it — Intel (NASDAQ: INTC) stock has been having a bad year. The chip giant’s share price has fallen roughly 40% across 2024’s trading, and it’s now down 60% from its lifetime high.

Unfortunately, Intel is facing some powerful near-term headwinds that have made the market reassess the company’s turnaround prospects. While Intel’s core business units actually served up solid results in the first quarter, weak performance from businesses and growth bets that the company has made over the last decade are weighing in its results. Revenue still rose roughly 9% year over year to hit $12.7 billion in Q1, thanks largely to an easy basis of comparison to last year’s terrible quarter, but the stock got crushed after its recent earnings report.

Additionally, the company is facing geopolitical headwinds. Intel’s sales outlook is facing some pressure now that China has blocked the use of its processors in computers used for government purposes. News also recently hit that Intel had lost the export license that gave it permission to sell processors to Huawei — a leading Chinese tech company. On the other hand, Intel could actually wind up being a long-term beneficiary of mounting tensions between the U.S. and China.

Unlike most semiconductor companies, Intel actually designs and manufactures the majority of its own chips. Because chip fabrication is so resource intensive, most chip companies opt to simply design their own semiconductors and then contract for fabrication services with a third-party provider.

When it comes to the fabrication of high-performance chips used for AI and accelerated computing applications, Taiwan Semiconductor Manufacturing remains the clear leader in the space and reportedly has around 90% market share. With indications that China will make moves to exert greater control over Taiwan within the next decade, TSMC’s crucial importance in the semiconductor supply chain presents striking economic and national security threats to the U.S. and other Western countries.

In response, Intel is making fabrication services for outside customers a much bigger part of its business — and it’s already receiving massive subsidies from countries focused on improving their domestic chip production capabilities. Intel’s turnaround and rise as a third-party fab are still in the early stages, but the long-term payoffs for investors who back the stock at this beaten-down point could be huge.

An AI stock primed for a rebound

Jeremy Bowman: Arm Holdings (NASDAQ: ARM) hasn’t even been public for eight months, but the stock has packed in plenty of volatility during that time.

The chip stock went public at $51 a share last September and soared as high as $164 in the aftermath of its fiscal third-quarter earnings report in February. Since then, the stock has pulled back, in line with a broader sell-off in AI stocks, and is now down 27% from its peak.

However, Arm looks like a good bet to outperform in the near term and move higher over the long haul.

First, the company has a close relationship with Nvidia, which licenses its CPU architecture for its chips, including its new Blackwell platform. While Nvidia hasn’t yet reported earnings this quarter, all signs point to another strong quarter for the AI chip leader.

Companies like Tesla and Amazon have called out their own relationships with Nvidia and touted their growing hoard of GPUs, showing how in-demand Nvidia’s products are. Arm also benefits from a long history of making power-efficient chip designs, which are favored in AI since running models like ChatGPT requires large amounts of power.

Additionally, demand for AI products remains strong, even as investors have sold off AI stocks in recent weeks. Super Micro Computer just reported year-over-year revenue growth in its fiscal third quarter of 200%, which bodes well for Arm’s demand outlook.

Arm has exposure to non-AI businesses as well, so it won’t deliver the same eye-popping growth as Supermicro, but its competitive advantages, along with its power-efficient architecture, close relationship with Nvidia, and licensing business model, should help the company recoup its losses and deliver strong performance over the longer term.

Should you invest $1,000 in Intel right now?

Before you buy stock in Intel, consider this:

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jeremy Bowman has positions in Amazon. Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Taiwan Semiconductor Manufacturing, and Tesla. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel and short May 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.

A Bull Market Is Here: 2 Artificial Intelligence Stocks Down 27% and 60% to Buy Right Now was originally published by The Motley Fool

Source: finance.yahoo.com