Everyone is talking about the artificial intelligence (AI) bubble, with some fearing it and some embracing it. Bubble or no bubble, AI is going to alter the way we live in the next 15 years, as the internet did. Many investors are using the 2000 dot.com bubble to map the immediate risk of a crash. But if we look at the evolution of the internet, it has created trillion-dollar companies. And these are not those who provided the hardware for the internet, but those who tapped its power to offer conventional services globally. AI also presents a similar long-term growth opportunity.
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AI stocks for medium-term gains
When it comes to AI, the first Canadian stock that comes to mind is Celestica (TSX: CLS), which manufactures Ethernet switches for Broadcom and servers for data centres. Celestica’s stock has rallied 2,400% since June 2023 and could continue to rally as the Ethernet switch market is expected to grow at a compounded annual growth rate (CAGR) of 30% by 2029.
Celestcia is tapping the US$50 billion addressable market of high-bandwidth Ethernet switches by introducing a 1.6 Terabit switch in 2025 after introducing the 800-gigabit-per-second (Gbps) data centre switch in 2024. It plans to scale to 3.2Tbps and above. It is also tapping the custom application-specific integrated circuit (ASIC) market, which is expected to grow at a CAGR of 54%.
However, Celestica’s growth could normalize in the next five to seven years, once the base network infrastructure is in place. The long-term growth will come from upgrade cycles, as it happens for Intel and other chip companies.
Which AI stocks will generate long-term gain?
For long-term growth, you have to think about how and where artificial intelligence will be used. For instance, Amazon, Microsoft, and Facebook were the biggest beneficiaries of the internet age. They used the internet to create e-commerce, cloud, and social media applications.
Shopify (TSX: SHOP) is using AI tools to enhance e-commerce reach. It has partnered with OpenAI to enable merchants to sell items on ChatGPT. Only looking at the AI-driven traffic, it increased sevenfold since January, and AI-based orders rose 11 times.
However, AI is still a small portion of Shopify’s revenue and volumes. It could benefit from the growing adoption of AI, as Shopify will use AI as a tool to sell goods and services. The medium term may not see any AI-driven rally, but the rally would likely be gradual and reflected in earnings.
While Shopify is the e-commerce opportunity of AI, Hive Digital Technologies (TSXV:HIVE) could be the cloud opportunity of AI. It is building high-performance computing (HPC) data centres, which it will lease to companies. Hive is optimistic about growing the BUZZ HPC business sevenfold from US$20 million in 2025 to $140 million in 2026. This will be a high-margin business with an anticipated operating margin of 80% after deducting electrical and data centre costs.
Hive could see volatility in the short and medium term as more than 95% of its revenue still comes from Bitcoin mining. As the revenue contribution of BUZZ HPC grows, the share price will grow, and this growth will be stable.
Facilitators for dividends
If you want to tap the dividend opportunity AI is bringing, look to invest in AI data centre facilitators. AI data centres need significant electricity, and most of it is coming from gas-fired power plants. TC Pipelines and Canadian Utilities are tapping AI power needs with their gas transmission and electricity supply, respectively. BCE and Telus are tapping the AI opportunity to provide digital solutions to enterprises.
The initial investment in creating the AI infrastructure will stress their finances and dividends in the short term. However, this infrastructure will generate significant cash flow in the long term, enabling these companies to accelerate dividend growth.
Investor takeaway
The short-term AI opportunity is in hardware, as there is strong demand for it from those building AI infrastructure. The long-term opportunity will come from those using the AI infrastructure to scale traditional businesses.
