The AI gold rush is here. Buy ‘picks and shovels’ to benefit.

Since ChatGPT launched nearly a year ago today, humanity has been fascinated with generative artificial intelligence. And while much of the attention from investors has been placed on companies like megacap tech companies, investment firm Redburn Atlantic says the AI “gold rush” can provide opportunities elsewhere.

Analyst Timm Schulze-Melander said semiconductor companies should give investors a “well diversified” risk-reward exposure to the AI wave, highlighting companies such as Applied Materials (NASDAQ:AMAT), ASM International (OTCQX:ASMIY) and Lam Research (NASDAQ:LRCX) among those likely to benefit the most.

He said vertical scaling adoption, along with gate-all-around, or GAA, transistors and backside power delivery chip architectures, should help the aforementioned trio “deliver superior 3–5-year earnings growth as a result.”

“These attributes will encourage investors to look through a challenging 2024 and start pricing in the more attractive earnings outlook visible in 2025 and beyond,” Schulze-Melander wrote in an investor note.

Schulze-Melander, who also started coverage on KLA Corp. (NASDAQ:KLAC), said the industry is “notoriously anticipatory” and likely to come out of its cyclical trough in 2024, citing several reasons, including the rebound of the PC and smartphone markets. He said the inflection in both dynamic random access memory, or DRAM, and NAND prices helps corroborate the rebound in PCs and smartphones.

Despite that, recent data points, such as the end to a two-year decline in smartphone sales, suggests the improvement is in the “early stages.” Schulze-Melander forecasts handset sales to decline 5.2% this year before rising 4.3% next year.

Delving further into AI, Schulze-Melander said areas like data centers and PCs need the technology to migrate from large language models to actual revenue-generating applications, if a “sustained recovery” is to take place. Microsoft (MSFT) and its Copilot tool, which launched for enterprise earlier this month, might be an “important early use-case for investors,” Schulze-Melander explained.

Schulze-Melander said memory chipmakers could offer a “cyclically attractive investment opportunity” early on in the cycle, as memory is already five quarter in from a production and spending correction, while better demand from PCs, data centers and smartphones should help “a recovery to equilibrium in the latter half of 2024.”

Nvidia (NVDA) has obviously benefited for the surging demand for AI accelerators, which Schulze-Melander said is likely to remain “buoyant.” However, expectations of 50% year-over-year growth suggest much of that demand is already anticipated, which may lead to opportunities for investors elsewhere.

Companies like Intel (INTC) and AMD (AMD) have the ability to offer inferencing hardware configurations and deliver positive surprises for CPU demand, while those that are powered by Arm Holdings (ARM) architecture in the customer silicon and application areas should see “very strong” growth rates over the next two years.

In the semiconductor capital equipment space, the aforementioned trio of Applied Materials (AMAT), ASM International (OTCQX:ASMIY) and Lam Research (LRCX) should benefit, given their exposure to GAA, along with backside power delivery networks (ASM and Lam Research) and chiplet hybrid bonding, Schulze-Melander explained.

However, not all companies are created equal and Schulze-Melander said Dutch chip equipment maker ASML (ASML) could face issues next year for several reasons, including the delay to its extreme ultraviolet lithography tool. Management changes could also be an issue, as the terms of CEO Peter Wennick and CTO Martin van den Brink expire in April 2024, which Schulze-Melander said “risks putting pressure on the valuation multiple.”