While most investors overlook this critical piece of the AI ecosystem, Alex believes it could become one of the most important beneficiaries of the next phase of the tech boom.

He details this below…

– James Ogletree, Senior Managing Editor

Artificial intelligence has generated no shortage of commentary – breathless predictions, dire warnings, sweeping promises. Yet for all the noise, very little attention is being paid to the single most important question for investors: What must happen behind the scenes for AI to actually deliver on its potential?

Because while the conversation tends to focus on what AI can do, the more consequential issue is what AI requires to function at scale.

The newest generation of AI chips is astonishingly powerful. Nvidia’s latest architecture, for example, processes data at speeds that would have seemed impossible a few years ago. But this development has created a less glamorous – yet absolutely fundamental – challenge. These chips generate extraordinary heat, consume enormous amounts of energy, and produce more data per second than most existing systems can handle.

This is rarely discussed outside technical circles. Yet it is the limiting factor that determines how far and how fast AI can advance.

We are building larger and larger GPU clusters – some with hundreds of thousands of chips working in unison – and asking them to perform tasks that dwarf the demands of even the most powerful supercomputers of the last decade. But here’s the problem: These chips can’t operate effectively unless they can communicate with one another at incredibly high speeds… without melting the servers they occupy.

In other words, AI doesn’t rise or fall on clever algorithms alone. It depends on the physical infrastructure that underpins them.

And that’s where things get interesting.

There is a relatively small American company – one you almost certainly haven’t heard of – that has quietly solved the most important bottleneck in AI today. It doesn’t develop models or design chips. It builds the connective tissue that allows these chips to exchange data at blistering speeds while keeping heat and system instability in check.

Without this capability, the highly publicized advances in AI simply don’t work in the real world.

That’s why nearly every major player in the industry – Nvidia, AMD, Intel, Amazon, Microsoft, and others – relies on this firm’s technology. It is not an exaggeration to say that the most advanced AI clusters on the planet could not operate at scale without it.

This is the part most investors fail to appreciate.

Technological revolutions rarely reward the companies that generate the headlines. They reward the companies that quietly make the entire ecosystem function.

During the dot-com boom, investors bid up flashy internet stocks to absurd levels while ignoring the behind-the-scenes firms that enabled the internet to actually run. Cisco, which built the routers that moved data from point A to point B, became one of the most profitable investments of that era. So did companies like Akamai, which solved the problem of delivering content efficiently across the web.

Meanwhile, many of the companies that investors thought would change the world disappeared entirely. Their business models weren’t sustainable. Their valuations weren’t rational. And the innovations they hoped to commercialize were ultimately built – or bought – by others.

The same dynamic is unfolding today in AI.

Investors are clamoring for the biggest names, the megacap platforms spending billions to stay ahead of their competitors. And many of these firms will continue to do well. But the most underappreciated beneficiaries of the AI boom are not the giants creating the models. They are the companies enabling those models to run safely, reliably, and at scale.

Consider the magnitude of what’s happening right now. Global data-center construction is accelerating at a rate we’ve never seen. Companies are racing to build new GPU clusters as fast as they can pour concrete. Entire power grids are being upgraded just to support these facilities. And late last year, a consortium of some of the largest firms in the world announced a multi-hundred-billion-dollar initiative to build what may become the largest AI supercomputing system ever attempted.

All of this expansion hinges on a single, unavoidable requirement: the system must be able to handle the data produced by the chips that power it.

Most investors don’t think about this step at all. They assume it’s already solved. It isn’t.

And that is precisely why the company addressing this challenge is not just a “nice to have” in the AI supply chain – it is foundational.

This is also where history acts as a guide. When investors become overly fixated on a narrow group of winners – whether it’s the Nifty Fifty in the 1970s, the dot-com darlings of the late 1990s, or the megacap tech giants of today – the biggest opportunities often emerge elsewhere. Not in the obvious place, but in the necessary place.

AI will undoubtedly reshape industries across the economy. It will enhance productivity, lower costs, accelerate drug development, improve supply chains, and transform manufacturing. But none of this happens unless the underlying infrastructure keeps pace with the models themselves.

In the meantime, investors would do well to remember that the biggest profits are rarely made where the crowd is already looking. They’re made where essential progress is being created – quietly, consistently, and before the rest of the world notices.

The post The AI Question People Aren’t Asking appeared first on Wealthy Retirement.

Broadcom (Nasdaq: AVGO) is a tech company that’s primarily focused on semiconductor solutions, including wireless chips used in smartphones and wired infrastructure used in telecom and data centers.

The company has been at the forefront of the discussion as a pick-and-shovel play for the market’s most recent darling: artificial intelligence.

The smarter AI gets, the more powerful and efficient semiconductors will need to be. That’s where Broadcom will step in to provide its products and expertise.

Marc’s love for Broadcom is justified, as the stock has gained over 1,000 points since he recommended the stock to readers back in 2020.

Add the dividend (which currently yields 1.4%) and the fact that Broadcom typically raises it every year, and you can see why Marc likes the stock so much.

He’s just returned from a well-deserved vacation, so you get me instead for the second week in a row. (I’m sure you all are absolutely thrilled!)

While he’s out and I’ve been given the reins, let’s see whether Broadcom’s dividend is safe or in danger of being cut in the near future.

First, as always, let’s look at Broadcom’s free cash flow.

It’s easy to see that Broadcom has a hefty piggy bank saved up to back up its dividend.

Since 2020, Broadcom has grown its free cash flow every year, and it’s projected to do the same this year.

All in all, by the end of 2024, free cash flow is expected to have nearly doubled over the past four years.

On top of that, Broadcom is continuing to pay an affordable dividend. Last year, it brought in $17.6 billion in free cash flow and paid out $7.7 billion in dividends for a payout ratio of just 43.4%. That’s well below our 75% standard.

This year, the company is expected to pay out $8.6 billion in dividends, and free cash flow should leap to over $22.7 billion. That would push the payout ratio even lower to 37.8%.

Finally, if that wasn’t enough, the company has increased its dividend every year for the past decade, which is always an extra boon.

There are plenty of reasons Marc counts Broadcom as one of his favorite stocks – and plenty of reasons to think its dividend is quite safe.

Dividend Safety Rating: A

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Today, this product is in your iPhone… your car… and even your electric toothbrush. It’s the world’s fourth-most-traded product, which makes it indispensable…

And yet, as the chip shortage rages on, the semiconductor is scarce.

Demand for electronics surged as the COVID-19 pandemic forced us to hunker down in the digital world. Meanwhile, demand for vehicles faded – so automakers canceled their orders.

Chipmakers pivoted, turning their focus to newer chips used in smartphones and laptops. Last year, less than 12% of chipmakers’ production spending went to tools to produce the more “commoditized chips” found in cars and speakers, according to The Wall Street Journal.

That’s less than half of what the industry spent on equipment for producing the more sophisticated chips found in smartphones.

When automakers came back to renew their orders, they found that they had been left behind.

Now producers like Toyota Motor Corp. (NYSE: TM) and General Motors (NYSE: GM) are feeling the pain. Ford Motor Company (NYSE: F) has cut production at multiple plants. One F-150 could be held up by a $50 part.

That’s because, in addition to chipmakers’ shift toward smartphones and laptops, a series of catastrophes, from the Texas cold snap to a factory fire in Japan, held up production. Not to mention the fact that U.S. sanctions embittered an already frosty relationship with Chinese semiconductor manufacturers.

The result? A distinctly 21st-century crisis known to some as “chipageddon.”

And it’s all hands on deck as the crisis unfolds. For example, Broadcom (Nasdaq: AVGO), one of the industry’s leaders, has reported that 90% of its supply for the year has already been ordered.

And auto chip supplier Texas Instruments (Nasdaq: TXN) boosted its revenue 29% from the first quarter of last year.

Meanwhile, Intel (Nasdaq: INTC) is footing a $20 billion bill to set up shop in two new plants in Arizona.

And the $50 billion that President Biden has pledged to boost U.S. chip manufacturing is yet another catalyst for a sector that has drastically outperformed the S&P 500 since 2016.

The following chart shows how, since 2016, the SPDR S&P Semiconductor ETF (NYSE: XSD) has more than doubled the return of the S&P 500.

What changed in 2016 that began setting chips apart from the rest of the market?

To answer this question, I turned to The Oxford Club’s resident expert on semiconductors (and former vice president of a semiconductor vendor), Engineering Strategist David Fessler.

As Dave said…

In 2016, the market finally started to realize the importance of semiconductors in nearly every sector.

There have been several big drivers that have fueled the boom in semiconductor chips. The world started to build the 5G infrastructure. Cars and trucks continue to be loaded up with electronic features. And now we have electric vehicles ramping up with even more chip content. The Internet of Things and Industry 4.0 are two more drivers.

Some experts credit the semiconductor industry for the tech sector’s magnificent rise. And tech’s bounds higher have recently decided the fate for the entire market, as information technology alone makes up more than 22% of the S&P 500.

Undoubtedly, semiconductors are key to making innovation possible.

This makes them a strong pick-and-shovel (err, chip-and-shovel) play for the country’s reopening.

According to Dave, “Semiconductor chipmakers are now in catch-up mode because of the pandemic. I believe the shortage will last well into 2022.”

So keep an eye on this sector – whether you watch the SPDR S&P Semiconductor ETF or, as Dave prefers, the Direxion Daily Semiconductor Bull 3X Shares ETF (NYSE: SOXL).

Prudential Financial’s chief market strategist has called semiconductors a bellwether for the larger economy – and as we saw in the chart above, they do track the S&P 500 – so they should be one of investors’ top industries to watch today.

Good investing,

Mable

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