Artificial intelligence (AI) is already a major growth driver for many technology companies, and is likely to continue to be one for years to come. IDC research estimates that spending on AI will contribute nearly $20 trillion to the global economy by 2030.
But which companies will benefit from the rise of AI over the next decade? Here’s why Nvidia. (NVDA -1.81%) and Taiwan Semiconductor Manufacturing (TSM -0.63%) It should be on your short list of AI stocks.
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1. Nvidia
Many companies are benefiting from artificial intelligence today, and Nvidia has the potential to continue capitalizing on this big trend for many years to come. Nvidia’s GPUs have long been a top choice for technology companies that want the best chips for their data centers, and the company commands an estimated 70% to 95% of the AI processor market.
This lead gives Nvidia a head start in the AI chip race, and the company continues to release new semiconductors to avoid failure. The latest version is the company’s Blackwell GPU for AI, which NVIDIA CEO Jensen Huang said in a third-quarter earnings call that it is already in the hands of top customers and is 2.2 times faster than the company’s Hopper GPU. said.
Huang is bracing the company for an unprecedented wave of spending on AI data centers, which he estimates will reach $2 trillion over the next five years.
The good news for investors is that it won’t take many years for Nvidia to reap the benefits of AI. In the company’s third quarter, which ended Oct. 27, sales increased 94% to $35.1 billion, and non-GAAP earnings rose 118% to $0.81 per share. Much of the company’s growth is already being driven by Nvidia’s data center division, whose revenue rose 112% to $30.8 billion in the quarter.
The important thing to note about Nvidia’s stock price is that it’s not cheap. The company’s stock currently trades at a price-to-earnings ratio of 54.5 times, higher than the S&P 500. (SNPINDEX: ^GSPC) 30.6. But with AI spending increasing and Nvidia leading the way in GPUs, there’s likely more room for the tech giant to play.
2. Taiwan Semiconductor
Taiwan Semiconductor has a unique angle in investing in AI because it has not developed cutting-edge software or high-performance processes. Instead, we manufacture semiconductors used in the world’s most advanced data centers.
The company makes about 90% of the world’s most advanced processors, and its business is rapidly growing. In the third quarter (ending September 30), the company reported sales of $23.5 billion, up 36% year over year, and profit of $1.94 per American Depositary Receipt (ADR), an increase of 54%.
Similar to Nvidia, huge demand for AI chips is likely to continue to drive Taiwan Semiconductor’s growth over the next few years. On the latest earnings call, CEO CC Wei said that “nearly every AI innovator works with us,” and that his company is “probably the deepest and broadest in our industry.” It’s growing,” he added. That means Taiwan Semiconductor will become the primary supplier of all processors as $2 trillion in data center spending increases.
Although Taiwan Semiconductor’s stock price has risen about 97% over the past year (as of this writing), the company’s P/E ratio is only 29.5 times, which is not prohibitively expensive. With demand for AI semiconductors on the rise, now is a good time to buy this chipmaker’s stock.
Chris Neiger has no position in any stocks mentioned. The Motley Fool has a position in and recommends Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
