Both of these artificial intelligence (AI) stocks are outperforming Nvidia and may still rise.

Nvidia The stock has been one of the biggest winners of the artificial intelligence (AI) revolution over the past two years, with notable gains of nearly 800% over the past two years due to strong demand for its graphics cards from data center but the last three months have been difficult for the chipmaker.

Shares of the semiconductor giant are down 1% over the past three months. This is somewhat surprising considering that Nvidia delivered an excellent set of results during this period that exceeded Wall Street’s expectations. In addition, Nvidia’s guidance was also better than what analysts were looking for.

However, concerns about Nvidia’s ability to sustain its exceptional growth, its valuation and the near-term margin pressure that will be created by the ramp-up of its latest generation of Blackwell processors appear to be weighing on the price of the company’s shares. Meanwhile, two other little-known chip companies have received a big boost in the past three months thanks to the positive impact of AI on their businesses: Ambarella (NASDAQ: AMBA) i Lumentum Holdings (NASDAQ: LITE).

While Ambarella shares have risen 25% in the past three months, Lumentum has appreciated nearly 23%. Its earnings have been better than what Nvidia has delivered over that period, and the bright side is that the two smaller chipmakers’ AI-focused growth drivers are just getting started.

Let’s see how AI is becoming a catalyst for Ambarella and Lumentum.

The chips designed by Ambarella are deployed in automotive and Internet of Things (IoT) applications The company is primarily known for its computer vision chips that process images and video, and is now also finding applications in the field of AI. According to an estimate, the AI computer vision processor market size could grow from USD 17.2 billion in 2023 to USD 45.7 billion by 2028 on the back of growing demand from multiple verticals such as automotive, security and surveillance and consumer electronics applications.

Ambarella’s product portfolio already includes chips capable of processing AI workloads in these applications. For example, the company’s CV5 processor, which is based on an advanced 5-nanometer (nm) process node, can run AI-based algorithms in automotive cameras, consumer cameras and even robotics. Not surprisingly, the company is witnessing an increase in demand for this processor.

CEO Fermi Wang commented on the company’s November 2024 earnings conference call that its new, higher-priced AI inference processors, such as the CV5, are driving record AI revenue and also contribute to a higher average selling price (ASP). The bright side is that Ambarella expects strong demand for the CV5 to continue into fiscal year 2026, which starts next month. Additionally, the company estimates that demand for its CV7 AI vision processor family will increase starting in the new fiscal year.

More importantly, this strong demand translates into exceptional growth for Ambarella. Its revenue in the third quarter of fiscal 2025 (which ended October 31, 2024) rose an impressive 63% year-over-year to $82.7 million. The chip maker also posted adjusted earnings of $0.11 per share from a loss of $0.28 per share in the year-ago period.

Ambarella’s fourth-quarter fiscal guidance of $78 million would translate to a 51% increase in its revenue over the year-ago quarter. The company is on track to end fiscal 2025 with total revenue of $279 million, which would represent a 23% improvement over the previous fiscal year. Its loss is expected to narrow to $0.30 per share from $0.83 per share in fiscal 2024.

As the chart below shows, Ambarella’s top and bottom lines are on track to improve further over the next two fiscal years, and the company is expected to report adjusted earnings per share in fiscal 2027.

Chart of AMBA's revenue estimates for the next fiscal year — AMBA’s revenue estimates for the next fiscal year data for YCharts

The global AI computer vision market is slated for impressive growth over the next three years, so it won’t be surprising if Ambarella delivers the healthy growth Wall Street expects. The company could also maintain its positive momentum for a longer period, as it claims to have a portfolio of $2.2 billion in automotive revenue through fiscal 2031.

Throw in the prospects of AI computer vision processors in other areas, such as consumer cameras and security applications, and Ambarella may have enough room to grow its business significantly in the long term.

The growing demand for high-speed data transmission in AI servers is driving strong growth in the network equipment market. According to Morningstar, spending on generative AI networking equipment could grow at an annual rate of 34% between 2023 and 2028, generating annual revenue of $34 billion by the end of the forecast period.

Lumentum Holdings is already benefiting from this trend, witnessing a turnaround in its financial performance in the last quarter. The company’s revenue for the first quarter of fiscal 2025 (ending September 28, 2024) rose 6% year-over-year to $337 million. While this may not seem very impressive at first, investors should note that Lumentum’s top line was down 23% in fiscal 2024 due to soft demand from the cloud and networking and industrial segments .

However, things have started to change for the better thanks to AI. Its cloud and networking revenue rose 23% year-over-year in the first quarter of fiscal 2025, offsetting weakness in the industrial business. With cloud and networking now producing nearly 84% of Lumentum’s top line, this business is poised to drive stronger growth for the company.

Lumentum notes that its cloud customer base is growing with the addition of new hyperscale customers that are placing orders for its lasers that are used in fiber optic cables to enable high-speed data transmission to servers. i.a. In addition, Lumentum is busy expanding its manufacturing capacity to handle more orders.

These favorable developments explain why Lumentum’s revenue estimate of $390 million for the current quarter would again represent a 6% year-over-year improvement. Even better, analysts expect the company’s growth rate to improve as the year progresses. Consensus estimates call for a 17% increase in Lumentum’s fiscal 2025 revenue to $1.59 billion, which is expected to be followed by even stronger growth next fiscal year.

LITE revenue estimates for the current fiscal year chart — LITE Revenue Estimates for the current financial year data for YCharts

Strong top-line growth is expected to filter through to the bottom line, with Lumentum’s earnings expected to rise 56% in the current fiscal year to $1.58 per share, followed by growth healthy also in the next two years.

LITE EPS estimates for the current fiscal year chart — LITE EPS estimates for the current fiscal year data for YCharts

It will not be surprising to see the market reward this technology value with more advantages thanks to its improving earning power. That’s why it’s not too late for investors to buy Lumentum Holdings, as its cloud and networking business looks poised for better times thanks to AI.

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They drive hard has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Nvidia. The Motley Fool recommends Lumentum. The Motley Fool has one disclosure policy.

Both of these artificial intelligence (AI) stocks are outperforming Nvidia and may still rise further was originally published by The Motley Fool

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