Here’s an AI Stock You’ve Never Heard Of. It’s Riding Nvidia’s Coattails.

Investors this week are once again worried about the payoff from AI. But the fundamentals haven’t changed. AI spending remains strong. (Sameer Al-Doumy/AFP/Getty Images)

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It’s Electric. Hi everyone. It’s been a rough week for AI-related stocks after OpenAI CEO Sam Altman said a bubble is brewing in the space, with some investors becoming too enthusiastic about the near-term opportunities.

Yet in the same conversation, Altman talked about ChatGPT facing overwhelming demand, shortages in GPUs, and his intention to spend trillions of dollars on AI data centers in the coming years.

So, I wouldn’t go too deep with Altman’s commentary. He may just want to make it tougher for rivals to get funding.

We’ve seen pullbacks in AI sentiment before. I can’t tell you how stocks will trade today, tomorrow, or next month, but I’m still confident in the AI theme since the underlying fundamentals haven’t changed. It has been prudent to focus on the long term. Let’s not forget that a few weeks ago, nearly all of the large technology companies raised their capital expenditure spending plans and said they didn’t have enough AI capacity to serve customer demand.

One good thing about selloffs is they offer attractive dip-buying opportunities. The most promising trend right now is around the rollout of Nvidia rack-scale AI servers. The GB200 NVL72—which incorporates 72 GPUs linked inside one server rack and offers much improved performance versus the prior model—is finally shipping in volume.

Last week, Foxconn, one of Nvidia’s largest server manufacturers, projected more than 170% year-over-year growth in AI server revenue in the current quarter—up from the more than 60% growth in the second quarter. That’s a big acceleration. The company also said AI rack server shipments would be even stronger in the third quarter.

“AI rack shipments [are] growing threefold quarter-over-quarter, reflecting continued strong demand from customers and stable production optimization,” Foxconn executive Kathy Yang said in a statement.

I’ve been arguing that current Wall Street forecasts for Nvidia’s earnings are understated with the NVL72 AI server outperforming estimates over the next few quarters.

Today, I have another stock to play the latest weakening in the AI trade: Credo Technology .

Credo is a leader in high-speed data connections used in AI data centers. The company offers a variety of products, including optical devices and data networking chips, but its Active Electrical Cables or AECs, are the most exciting part of their business.

Credo invented the AEC. AECs are copper-based cables used to attach AI servers to networking switches. They are more reliable and consume less power than optical cables and can be used for longer distances than traditional passive copper cables. According to research firm 650 Group, Credo has 73% of the AEC market as of the last reported quarter.

AEC is in the sweet spot right now. As the market moves to rack-based servers with higher GPU density, such as the Nvidia GB200 NVL72, more AEC cables will be needed to connect the larger clusters.

Customers buy from Credo because reliability and quick service are important for large technology companies building AI clusters on short deadlines. According to Needham, Amazon , Microsoft , and Elon Musk’s xAI are among Credo’s top customers.

To be sure, Credo shares aren’t cheap. The stock trades at roughly 63 times projected earnings for the next 12 months with estimated revenue growth of 92%. Its shares are up 54% this year, but they’re down 20% from its high earlier this month.

I predict there is more upside to come, with the company posting better results than the current consensus. Credo grew sales by 180% in its last reported quarter ahead of an estimate for 163%.

If Credo can continue to beat expectations, there is potential for multiple expansion that drives shares higher. The company reports its fiscal first quarter results in early September. We’ll be watching.

This Week in Barron’s Tech

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• Intel Stock Rises After SoftBank’s $2 Billion Investment. Why It’s About More than Money.
• Analog Devices Stock Gains as Earnings Bring Hope for ‘True Recovery’
• Snowflake Stock Gets an Upgrade Ahead of Earnings
• Duolingo Stock Rises. Why AI Fears Are Overblown, Analysts Say.

Write to Tae Kim at tae.kim@barrons.com or follow him on X at @firstadopter.