Is This the Right Time to Buy Into the AI Hardware Boom?

The current highs in the stock market would likely not have reached its current extent if not for the artificial intelligence (AI) hardware boom. Stocks like Nvidia (NASDAQ: NVDA) and Broadcom surged as investors took notice of the massive growth in hardware stocks supporting generative AI.

Amid those increases, AI hardware stock Nvidia is up by around 1,600% since its 2022 bottom, and such gains could lead investors to assume they have missed the AI hardware boom. Knowing that, should investors move on from this sector, or are the future gains enough to persuade investors who missed the boom to buy these stocks?

Image source: Getty Images.

What investors have missed

Indeed, the state of Nvidia indicates that most gains have been made in parts of the AI hardware sector. Nvidia's challenge is its size. At a market cap of $4.6 trillion (down from a recent high of more than $5 trillion), it is the world's largest publicly traded company.

Moreover, an additional 1,600% gain would take the market cap to $78 trillion, a size no company is likely to reach in the foreseeable future.

Also, Nvidia is not the only sizable AI hardware company. The aforementioned Broadcom has reached a market cap of $1.6 trillion. Additionally, Taiwan Semiconductor's market cap has reached $1.5 trillion, making gains of tenfold or more nearly as unlikely in the near term.

Other companies at the cutting edge of AI technology are contending with high earnings multiples, notably Tesla at a P/E ratio exceeding 270. Others, like IonQ, lack a P/E ratio since they are nowhere near profitability. Still, with a price-to-sales (P/S) ratio of around 150, its price is years ahead of its growth.

Signs of hope

Nonetheless, the industry's growth is likely far from over. Grand View Research estimates a compound annual growth rate (CAGR) for the AI market of 32% through 2033. Additionally, it forecasts a 29% CAGR specifically for the AI chip market and a 23% CAGR for the cloud computing market. Such tailwinds should sustain AI hardware stocks for some time to come.

Moreover, not all AI hardware stocks are at a level where they could experience massive growth. ASML, which manufactures hardware for advanced chip production, has a market capitalization of just under $400 billion, a level slightly above Nvidia's market capitalization at its 2022 low.

Moreover, ASML also sells at a 38 P/E ratio. This is slightly above the S&P 500 average earnings multiple of 30, but nothing like the P/E ratio of Tesla.

Other AI hardware stocks are outright bargains. Qualcomm, which remains a leader in smartphone chipsets, traded at a P/E ratio of 16 before a one-time income tax expense temporarily spiked its earnings multiple.

Furthermore, two Magnificent Seven stocks are in this category. Indeed, Alphabet and Meta Platforms are not as well-known for hardware, but they have ventured into that part of the tech business. The P/E ratios for these companies are 27 and 28, respectively, below the aforementioned S&P 500 average. Thus, if investors still wish to capitalize on AI hardware stocks, they can find numerous opportunities.

Is now the right time to buy into the AI hardware boom?

Investors can still buy into the AI hardware boom with a high likelihood of earning outsized returns.

Admittedly, investors now have to be more selective than in past years. Although Nvidia is likely not done growing, its $4.7 trillion market cap will make it difficult to repeat the success level of the past. Also, stocks like Tesla may not be great buys at the moment due to high valuations.

Fortunately, not all AI hardware stocks trade at high market caps or valuations. In fact, stocks like Qualcomm appear to be inexpensive, and AI stocks known for their work in other areas are also trading at relatively low levels.

Ultimately, the CAGRs for AI and related industries indicate that rapid growth is expected to continue for several years in the future, and it is not too late for new investors to benefit.

Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML, Alphabet, IonQ, Meta Platforms, Nvidia, Qualcomm, Taiwan Semiconductor Manufacturing, and Tesla. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.