If British naturalist Charles Darwin were alive today it might be the evolution of Artificial Intelligence which might tempt him to get out his sketchbook rather than a sighting of some beautifully beaked birds.
Elevate Your Investing Strategy:
- Take advantage of TipRanks Premium at 50% off! Unlock powerful investing tools, advanced data, and expert analyst insights to help you invest with confidence.
Despite the recent gloom over the future of the seemingly unstoppable AI sector, there is clear evidence – like those animals in the Galapagos Islands centuries ago – that its structure is simply evolving.
The advantage for investors is that this will be a somewhat faster change than the one that took us from first the water, to the trees and now in front of a computer screen. Indeed, it is already happening.
“There was a lot of consternation about Nvidia’s (NVDA) sputtering response to its recent numbers. But investors are finding other AI niches with more runway ahead of them,” said David Russell, Global Head of Market Strategy at TradeStation. “Investors started with Nvidia and Palantir (PLTR) which were in some sense the brains of AI. But now they’re turning to fiber optics and data storage, which are the muscle and bone. Like a new evolving species, AI is adapting as its habitat widens.”
AI Cracks
Indeed, AI stocks such as Nvidia, Palantir and Meta (META) have produced a stellar performance in the last few years. The Nvidia share price is up over 58% in the last 12 months, with Palantir up 351% and Meta up 49%.
They have been driven by the increased use of AI in all areas of life. But, as Russell pointed out, wobbles are emerging in the growth narrative.
Nvidia recently reported Q2 revenues of $46.74 billion, beating estimates of $46.23 billion, and rising 56% compared to a year earlier. However, its share price slumped as it revealed it had registered no sales of its H20 chips to China during the quarter, even though China export restrictions by the U.S. government were eased. It also failed to include forward projections of Chinese revenue.
“The other disappointment was Nvidia’s continued reliance on a handful of mega-cap tech companies to generate the bulk of its revenue. Its revenue remains extremely concentrated,” said Kathleen Brooks, research director at XTB. “Cracks are starting to appear in the AI trading narrative, as investors fret that a weak US economy could see the uptake of AI slow. This would be a major threat to the AI trade.”
Palantir stock has also slowed, dropping from around $180 in mid-August to $169.31 as of September 13. The main drag was when famed short seller Andrew Left went on Fox Business and said Palantir’s valuation was “so absurd” that it was bound to correct by 50%. “There’s never been a company that has that type of multiple or that type of P/E that’s not corrected,” he said. Palantir’s current valuation is $376 billion.
Adding to the AI angst is a recent report from the Massachusetts Institute of Technology that said 95% of the companies it studied are getting no return on AI. In addition, Sam Altman chief executive of ChatGPT group OpenAI has raised fears that AI could be in a bubble, similar to the infamous dotcom crash of the early 2000s.
Nerves and Muscles
Russell however believes AI still has legs. “AI is a trend like the industrial revolution or the rise of railroads. It will impact many aspects of most people’s lives, creating endless opportunities for new kinds of investment,” he said.
So, where are the niches that Russell highlighted? Never mind the brains, where exactly are the bone and muscle?
For Russell, fiber optics are the nerves transporting data for the brain and the rest of the body. Fiber optics offer lower latency and higher bandwidth capabilities to ensure quick and efficient data transfer between interconnected servers.
They are vital in the training and deployment of AI models.
Stocks in this sector include AI networking systems and software firm Ciena Corporation (CIEN). Its share price has jumped 86% over the last 6 months helped by recent Q3 revenues surging 30% year-over-year to $1.22 billion and record earnings per share of $0.67. It also expects to deliver approximately 17% year on year growth in fiscal 2026.
Earlier this month, analysts at Rosenblatt raised its price target on Ciena to $127.50 from $100. It said Ciena is seeing notable data center interconnect demand strength.
Other fiber names include Credo Technology Group (CRDO), whose stock is up 277% in the last six months, and Fabrinet (FN), which is up 96% over that same period.
Data storage is like bones and muscles– all that knowledge of human language, history, literature and science including our friend Mr Darwin. That, and every other process AI does, needs to be stored.
Stocks in this group include data storage technology and solutions group Seagate Technology (STX). Its share price is currently at a record high of $210 driven by surging demand for high-capacity storage in AI applications and advancements in heat-assisted magnetic recording (HAMR) technology where it has an edge over rivals.
HAMR uses lasers to heat a hard disk and increase the amount of data that can be stored.
Other fired up storage stocks are Western Digital Corporation (WDC), up 110% this year, Pure Storage (PSTG) up 65% in the last six months and San Disk Corporation (SNDK) up 92% this year to a best-ever $70.51.
Getting Connected
Other stocks investors may not necessarily think about when scanning the AI sector are Amphenol (APH) and TE Connectivity (TEL) which both make connectors and cable assemblies for sectors including data centers.
Newer AI related names for investors to chew on include Astera Labs (ALAB), which is a semiconductor company specializing in connectivity solutions for AI infrastructure and cloud data centers. In the second quarter, it achieved a record revenue of $191.9 million up 150% year-over-year.
During the quarter, Astera Labs expanded its partnership with Nvidia to support the growth of the NVLink Fusion ecosystem. This collaboration aims to give hyperscale data centers more options for building high-performance, scalable networks using Nvidia’s NVLink technology.
Investors could also check out Arista Networks (ANET) in the cloud networking space. Nebius Group, (NBIS) is a cloud and infrastructure company which recently announced that it will provide Microsoft (MSFT) with GPU capacity worth $17.4 billion over a five-year period.
Unity Software (U) is another stock to watch having soared 100% this year. Its platform provides software solutions to create, run, and monetize interactive, real-time 2D and 3D content for augmented and virtual reality devices.
Its partnerships include Tencent (TCEHY), Scopely, and Nintendo, giving it strong exposure to the booming gaming market and China where the government is supporting tech firms to take on the U.S. in the AI race.
SOFTWARE DODOS
Other software stocks, particularly Software as a Service firms, may, however, suffer in the AI evolution.
A recent study from Alix Partners found that more than 100 public software companies are getting ‘squeezed’ by AI. Stocks vulnerable to AI include ServiceNow (NOW), Gartner (IT), Salesforce (CRM), Accenture (ACN) and Adobe (ADBE).
AI servers could also be the place where margins go to die. Dell (DELL) stock dropped after its Q2 results as it said Q3 adjusted earnings per share would have a midpoint of $2.45, missing the $2.55 analysts were expecting. Server group Super Micro Computer (SMCI) stock is down around 30% over the past month after trimming its Fiscal 2026 revenue outlook by $7 billion to $33 billion.
This is an area which may have already lived its best life.
After all, as Darwin would say – someone has to be the dinosaur or the dodo – see above – in the new AI world.