The Internet of Things, machine learning, and artificial intelligence are the key catalysts driving trends in the semiconductor market. Likewise, the market is expected to grow by $157.1 billion at a compound annual growth rate of 4.5% by 2029, as per estimates by Technavio. The growth would be fueled by the growing need for chips to power the telecom sector, automotive, consumer electronics, IT and communications, healthcare, aerospace and defence, and consumer goods.

Similarly, the growing demand for semiconductors brought on by emerging technologies like 5G, AI, and the Internet of Things (IoT) presents serious challenges for the semiconductor industry. Two to four million gallons of ultra-pure water are needed every day at a single semiconductor fabrication plant, which uses about one Terawatt-hour (TWh) of energy annually.

Additionally, tussles between nations could pose significant challenges to the semiconductor sector, consequently hindering the development of artificial intelligence innovations. Countries passing protectionist measures to curb access to advanced semiconductors are seen as one hindrance to the robust growth projected.

In addition to its potential to improve access to food, healthcare, and education, artificial intelligence (AI) can also aid in developing biological and other weapons, support cyber attacks, aid in surveillance, and contribute to other human rights violations.

“The potential military, intelligence, surveillance, and cyber-enabled applications of these technologies and products pose risks to U.S. national security particularly when developed by a country of concern such as the PRC,” the Treasury Department notification said.

The US has already passed restrictions on Chinese firm’s access to advanced semiconductors and equipment developed by US companies. The restrictions come amid concerns that China’s gaining access to advanced semiconductors could pose significant security risks in the future.

China has also hit back with similar measures. China has blasted the United States for imposing new export restrictions on semiconductors made in the United States, which Washington believes Beijing may use to create the next generation of weapons and artificial intelligence (AI) systems.

“The U.S. has to be prepared for rapid increases in AI’s capability in the coming years, which could have a transformative impact on the economy and on our national security,” U.S. National Security Adviser Jake Sullivan said.

According to US Commerce Department officials, the new controls were intended to undermine China’s domestic semiconductor industry and slow the country’s development of sophisticated AI weapons that could be used in conflict, which pose a threat to US and allied national security. The US was accused of “abusing” export controls, and China’s Commerce Ministry denounced the action, calling it “a significant threat” to the stability of global supply chains and industry.

Amid the robust growth in the semiconductor sector amid a string of protectionist measures by the US and China, there are tremendous opportunities worth pursuing. The development of powerful semiconductors has opened the door for exciting and unique AI innovations increasingly driving stock valuations and shareholder value.

For this article, we selected AI stocks by going through news articles, stock analysis, and press releases. These stocks are also popular among hedge funds.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

Top 10 AI Stocks to Watch Amid Expanding Semiconductor Market

10. Globalfoundries Inc. (NASDAQ:GFS)

Number of Hedge Fund Holders: 22

Globalfoundries Inc. (NASDAQ:GFS) is a semiconductor foundry company that provides various mainstream wafer fabrication services and technologies worldwide. It manufactures various semiconductor devices, including microprocessors and mobile application processors. On February 12th, analysts at Needham upgraded the stock to a Buy with a $50 price target. The upgrade comes amid expectations that the company will return to robust growth in 2025 with meaningful gross margin expansion.

The return to growth would be driven by strong demand for the company’s fabrication services from various sectors, including automotive communication infrastructure and data centers amid the artificial intelligence boom. Management expects the automotive industry to grow at a 15% annual rate, similar to the fiscal year 2024, thanks to partnerships with AI companies, SATCOM applications, and demand for optical transceivers. Any possible growth is thought to be associated with an AI refresh cycle, even though the Smart Mobile Devices segment is predicted to stay flat year over year.

9. N-Able Inc. (NYSE:NABL)

Number of hedge funds: 27

N-Able Inc. (NYSE:NABL) is an information technology services company that provides cloud-based software solutions. It also helps IT service providers deliver security, data protection as a service, and unified endpoint management. On February 11th, the company confirmed successfully implementing its Adlumin Managed Detection and Response (MDR) solution at Ventnor City. The AI-powered solution successfully thwarted a cyber-attack within six hours of deployment, protecting the city’s police department from attempted intrusion. For quick threat mitigation, the MDR solution has both automated and human response capabilities and uses artificial intelligence to identify threats.

The solution uses artificial intelligence to identify threats that might otherwise go undetected by integrating with and ingesting data from current security. It goes beyond merely sending out alerts to guarantee that threats are quickly and efficiently reduced thanks to automated and human response capabilities.

8. Lumentum Holdings Inc. (NASDAQ:LITE)

Number of Hedge Fund Holders: 36

Lumentum Holdings Inc. (NASDAQ:LITE) is a communication equipment company that manufactures and sells optical and photonic products. It offers components, modules, and subsystems to support high-speed data transmission over high-capacity fibre optic links in cloud data centers, AI/ML, enterprise, and communications services. On February 7th, Simon Leopold of Raymond James reiterated a Buy rating on the stock and increased the price target to $96 from $94.

Lumentum Holdings Inc. (NASDAQ:LITE) has emerged as one of the key beneficiaries amid surging investments in artificial intelligence infrastructure and recovery in the telecom industry. The company’s datacom business remains well positioned to benefit from the demand for AI-driven data center connectivity. The US imposing tariffs on China is also expected to fuel demand for the company’s data transceivers.

7. IREN Limited (NASDAQ:IREN)

Number of Hedge Fund Holders: 28

IREN Limited (NASDAQ:IREN) is a financial services company that owns and operates Bitcoin and mining data centers. It also provides high-performance computing solutions, including AI cloud service. On February 12th, the company delivered record revenue and operating cash flow for the fiscal second quarter of 2025, attributed to strategic investments made in scale and efficiency in mining operations. Bitcoin mining revenue was up 129% to $113.5 million as net profit totaled $18.9 million, an improvement from a net loss in the same quarter last year.

The robust growth is being driven by strong demand for the company’s Horizon 1, 75MW direct-to-chip liquid deployment system for high-performance computing. IREN Limited (NASDAQ:IREN) is also taking advantage of the AI boom with a new 600MW Sweetwater 2 site, which is expected to create a 2GW data center hub. Last year, IREN purchased 1,080 latest-generation NVIDIA H200 GPUs to support its growing AI Cloud Services business, an investment that seems to be paying off, going by impressive financial results.

6. Digital Realty Trust, Inc. (NYSE:DLR)

Number of Hedge Fund Holders: 52

Digital Realty Trust, Inc. (NYSE:DLR) is a real estate company that brings companies and data together by delivering the full spectrum of data center, colocation, and interconnection solutions. It is a leading provider of data centers, colocation, and interconnection solutions. Analysts at Citi reiterated a Buy rating on the stock on February 11th.

According to the analysts, a slowdown in California’s data center construction for artificial intelligence will benefit Digital Realty Trust, Inc. (NYSE:DLR) as it already has facilities in operation. The team believes that these data centers’ pricing, margins, and returns may improve due to a slowdown in new data centers coming online. The remarks come amid growing concerns that wildfires, rate marking, and local opposition pose challenges to California’s growth of data centers. Consequently, it provides an opportunity for players with running data centers to benefit.

5. Baidu, Inc. (NASDAQ:BIDU)

Number of Hedge Fund Holders: 54

Baidu, Inc. (NASDAQ:BIDU) is an internet giant that provides online marketing and cloud services. Its core segment offers search-based, feed-based, and other online marketing services, cloud services, products, and other services for AI initiatives. On February 13th, Reuters reported that Baidu, Inc. (NASDAQ:BIDU) plans to make its AI chatbot Ernie Bot free of charge for all mobile and desktop users, from April 1, 2025.

4. Accenture plc (NYSE:ACN)

Number of Hedge Fund Holders: 60

Accenture plc (NYSE:ACN) is an information technology company that provides strategy, consulting technology, and operation services. It offers systems integration, application management, software engineering data, and AI and automation services. On February 11th, the company entered into a strategic collaboration with Google Cloud to accelerate the adoption of cloud solutions and generative AI capabilities in Saudi Arabia.

The strategic collaboration seeks to make it easy for organizations to leverage advanced technologies like AI to generate new business opportunities and improve customer experiences. The same should be achieved by establishing a contemporary digital core and scaling generative AI agents to improve enterprise intelligence and operational efficiency. The use of generative AI has the potential to increase the Kingdom’s gross domestic product by 4%, which is one of the reasons Accenture plc (NYSE:ACN) and Google Cloud are collaborating to advance AI initiatives.

3. Snowflake Inc (NYSE:SNOW)

Number of Hedge Fund Holders: 71

Snowflake Inc (NYSE:SNOW) is a technology company that provides a cloud-based data platform. It offers Data Cloud, which enables customers to consolidate data into a single source of truth to drive meaningful business insights. Mizuho analyst Gregg Markowitz raised the stock’s price target to $205 from $195 on February 12th and reiterated an Outperform rating.

The bullish rating comes amid improving demand patterns across the software sector, especially in data analytics and software as a service. The price target increase also affirms belief in Snowflake Inc’s (NYSE:SNOW) continued growth and success as it integrates artificial intelligence features into its solutions to strengthen its competitive cloud data platform. The company remains backed by a strong lineup of products, especially in AI, and is ready to contribute to growth.

2. Datadog, Inc. (NASDAQ:DDOG)

Number of Hedge Fund Holders: 71

Datadog, Inc. (NASDAQ:DDOG) operates an observability and security platform for cloud applications. Its products comprise infrastructure and application performance monitoring, log management, digital experience monitoring, continuous profiler, database monitoring, data streams, and universal service monitoring. On February 11th, Steven Koenig of Macquarie reiterated a Buy rating on the stock with a $200 price target.

Datadog, Inc. (NASDAQ:DDOG) has emerged as one of the companies well-positioned to benefit from the wave created by the growing demand for AI cloud monitoring services. The company is betting on strong demand for its AI-backed cybersecurity products. The ever-increasing number of Datadog clients implementing their AI applications in live production is anticipated to grow the company’s product usage. Cloud-based AI apps are expected to be widely adopted, which is good news for businesses like Datadog, which offers cloud infrastructure monitoring software.

1. Adobe Inc. (NASDAQ:ADBE)

Number of Hedge Fund Holders: 123

Adobe Inc. (NASDAQ:ADBE) offers digital marketing and media solutions through three segments: Digital Media, Digital Experience, and Publishing. Its products and services include Adobe Photoshop, Adobe Illustrator, Adobe Acrobat, analytics solutions, digital experience management, eLearning solutions, technical document publishing, web application development, and high-end printing.

On February 12, Adobe Inc. (NASDAQ:ADBE) launched the “Firefly Video Model,” an AI tool that generates video clips, to compete with OpenAI’s Sora. Adobe’s AI video generator offers professional TV quality clips and is compatible with Premiere Pro, creating high-resolution 1080p videos. Meta Platforms (META) is also developing a similar application. Adobe’s pricing includes 20 video clips per month for $9.99 and 70 clips for $29.99, compared to OpenAI’s offerings of 50 clips for $20 a month and a $200 plan for higher-resolution videos.

While we acknowledge the potential of Adobe Inc. (NASDAQ:ADBE) as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ADBE but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

READ NEXT: 20 Best AI Stocks To Buy Now and Complete List of 59 AI Companies Under $2 Billion in Market Cap.

Disclosure: None. This article was originally published at Insider Monkey.