Nvidia Is the Pricey AI Play. These 7 Stocks Are Real Bargains. Companies in emerging markets are important players in AI—and they are cheaper than many U.S. counterparts.
https://www.barrons.com/articles/nvidia-ai-stocks-bargains-asia-f468c260
Nvidia and a handful of other U.S. stocks have become almost synonymous with artificial intelligence. But investors willing to venture into emerging markets can find companies that are also critical for making AI a reality—at bargain prices compared with many stateside options.
Companies cashing in on AI include those in Taiwan, South Korea, and parts of southeast Asia. “If you are looking for AI, emerging markets is the place to look,” says Anthony Sassine, senior investment strategist for Krane Funds Advisors. He says that some of these companies have significant competitive advantages in the design, manufacturing, and packaging of chips. They are also a lot cheaper, with some trading at roughly half that of companies like Nvidia, Advanced Micro Devices, and ASML Holding.
Taiwan Semiconductor Manufacturing, which is responsible for about 90% of the world’s super-advanced semiconductors, is among the most well known and widely owned AI plays outside the U.S. At 23 times next 12-month earnings, it trades at about a 33% discount to Nvidia.
The stock is “tremendously cheap for an enabler of all the AI enthusiasm,” says Ben Durrant, an investment manager on Baillie Gifford’s emerging markets equity team, which has long held the stock. Part of that discount comes from the geopolitical cloud that looms over Taiwan, as the island nation remains a hot-button issue in the U.S.-China rivalry.
Many of the companies critical for transitioning the world to use AI go through Asia—and demand has already been a boon to supply chains through the region. For those who want to stick with megacap companies, two South Korean giants offer a way into AI. SK Hynix (ticker: 000660.Korea) is a leader in the high-bandwidth memory required by the latest processors from Nvidia and peers to power AI.
After inventory-related concerns last year, the memory company’s shares are up about 50% this year as demand for its AI-related chips begins to show up in its financials. While no longer a bargain at 1.8 to two times book value, it is still cheaper than some U.S. peers, and fund managers still see upside. The reason: AI-related products account for just 5% of last year’s sales, but SK Hynix says that could hit 60% by 2028. Rondure Global Advisors founder Laura Geritz has a more conservative expectation for AI sales but still sees further opportunity for the stock as AI—and high-bandwidth memory—powers a new leg of earnings growth for years to come.
For those looking for a better-known option, SK Hynix rival Samsung Electronics is one of the cheapest AI-related plays in Asia, says Hiren Dasani, Singapore-based co-head of global emerging markets equity at Goldman Sachs Asset Management. Samsung trades at 1.2 times book value, about 30% cheaper than SK Hynix.
Samsung comes with some baggage—including weakness in the other facets of its business, including smartphones, and lingering criticism that the founding family prioritizes control over shareholder returns.
Samsung is also lagging behind SK Hynix on high-bandwidth memory. Dasani sees a potential catalys t as the company tries to become qualified to be part of Nvidia’s supply chain over the next few months. If it succeeds, Dasani says it could change the market’s perception of Samsung into an AI play as it catches up to SK Hynix.
Korean companies have another potential catalyst as South Korea embarks on efforts to nudge companies to boost shareholder returns. Korea stocks have long been stuck because of governance-related issues, in part to its history of family-controlled business groups, or chaebols. Those concerns could recede as the government looks for reforms and a governance makeover similar to the one that Japan has implemented over the past decade, says Phillip Wool, global head of research for quantitative asset manager Rayliant Global Advisors.
MSCI Taiwan, an index that tracks Taiwan stocks, trades at about 19 times forward earnings, well below the 30 times earnings the Nasdaq Composite fetches. The MSCI Korea is far cheaper, at 10 times. Rayliant’s Wool attributes the gap to the Korea discount for complex corporate structures, messy governance with family-owned chaebols dominating the market, and a dismal record for shareholder rights. Details are still sparse, and it could take a while, but a reduction in the Korea discount offers another catalyst to stocks like Samsung.
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There’s also opportunity in smaller companies integral to the overall AI-supply chain or the buildout of infrastructure needed to support it. That includes companies such as Alchip Technologies (3661.Taiwan), which makes specific use of application specific integrated circuits, or ASICs, for the likes of Amazon.com, Intel, and Li Auto. These chips are smaller, more efficient, and less energy intensive than generalist central processing unit, or CPUs, and graphics processing unit, or GPUs, which makes them more attractive as the AI revolution increases energy demand. As a more direct bet on chips, AIchip is pricier than less pure-play AI opportunities. But at 27 times forward earnings, Wool notes that it is still cheaper than market-darlings like Nvidia and ASML.
One backdoor into AI is through companies engaged in cooling servers as the increased computer power for AI increases the need for liquid cooling rather than traditional air, which is several times more expensive. As Nvidia launches its new GB200 chip and server architecture, Todd McClone, a manager on William Blair’s emerging markets equities strategies, says it could draw more than double the electricity compared with current leading-edge products.
Server cooling could become a $10 billion market in two years, growing at a 30% compounded annual growth rate, according to McClone. One way in is through Asia Vital Components (3017.Taiwan), which provides these cooling technologies. While the shares have soared, with the stock valuation hitting mid-20s, McClone still sees opportunity, noting that the market is still underestimating the earnings potential and the speed of adoption of its solutions.
McClone and others are also looking at power-related stocks as another way to play AI, given the surging energy demands. Data centers could contribute to 7% of global power demand by 2035 as they try to support AI, a reason that some companies are investing aggressively in electrification and energy-efficient technology.
That benefits the likes of HD Hyundai Electric in Korea, which in the first quarter made up almost 40% of its full-year sales forecast. Given the strong growth, McClone says he expects further double-digit increases in sales and earnings, which justifies its current valuations. Plus, the stock trades at about a 14% discount to other global grid equipment options. The stock trades for under 20 times 2025 earnings.
Rajiv Jain, chief investment officer at global asset manager GQG Partners, owns Malaysia’s YTL Power International (YTLP.Malaysia). The company stands to benefit from a host of reforms in Malaysia of its power sector as it sees a data center boom and the country tries to become a regional hub, exporting power to Singapore and other parts of southeast Asia.
At 12.6 times next year’s earnings, valuations in Malaysia are still relatively attractive. “No one is paying attention to the sleepy market,” Jain says.
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