Spending on artificial intelligence (AI) infrastructure doesn’t seem to be stopping, with Microsoft recently announcing that it intends to spend $80 billion building data centers around the world this year. Meanwhile, as companies advance their AI models, the chips needed to train these models are increasing exponentially. Both Nvidia and Broadcom are talking about customers deploying more than 1 million AI chip clusters in the near future. This is a huge leap from what modern AI models have been trained on.
Let’s take a look at two semiconductor stocks that will benefit greatly from the continued proliferation of AI chips.
1. Taiwan Semiconductor
Currently, most chipmakers, such as Nvidia and Broadcom, only design the chips and leave manufacturing to third parties. Semiconductor manufacturing is a complex task that requires a lot of technical know-how, and manufacturers are constantly challenged to reduce chip size to increase processing power and reduce power consumption. At the same time, building a foundry (chip manufacturing facility) is a capital-intensive business (in other words, it costs a lot of money to build), and foundries must operate at near full capacity to be profitable.
A sign of how difficult it is to run a third-party foundry business is that even though Intel has spent a lot of money building foundries, this is the only division with significant losses. Samsung’s foundry business has also struggled significantly, with the division reporting huge losses last quarter and the company announcing plans to lay off 30% of the division’s employees and shut down half of its production lines.
However, one semiconductor contract manufacturing company has emerged as a clear winner in this space. That is Taiwan Semiconductor. (TSM 0.60%)TSMC for short. The company’s sales and profits are rapidly increasing due to the AI chip boom. Last quarter’s revenue increased 36% to $23.5 billion, and earnings per ADR increased 50% to $1.94 from $1.29 a year ago.
Given its size and technological advantages, the company has become the go-to contract manufacturer for advanced chips. This gives the company significant pricing power as rivals struggle, and its gross profit margin rose to 57.8% last quarter from 54.3% a year earlier. There are also reports that the company will raise prices towards 2025. Meanwhile, production capacity is also expanding by building a new foundry.
TSMC is one of the companies best positioned to benefit from the continuing chip boom, and its stock is attractively valued, with a forward price-earnings (P/E) ratio of 19.5x and a price-to-earnings ratio of ( PER). PEG) ratio 0.65. Generally, a PEG ratio below 1 is considered undervalued, but growth stocks often have a PEG ratio well above 1.
Image source: Getty Images.
2.ASML
TSMC manufactures semiconductor chips, but ASML Holdings (ASML -0.67%) is the company that makes the equipment that it and other foundries use to make these chips. ASML is the clear leader in extreme ultraviolet (EUV) lithography, the technology used to create these advanced chips. The company’s EUV machines can cost more than $200 million.
Meanwhile, the company recently introduced the next generation of high-NA EUV technology, but these machines cost a whopping $380 million each. Despite the struggles, Intel was the first company to invest in these next-generation machines, and TSMC received the first machines for trials towards the end of 2024. However, widespread adoption of these machines is probably several years away. TSMC said that high-NA EUV technology is not currently needed to manufacture the current generation of high-end chips.
ASML executives reportedly plan to meet with TSMC executives soon to discuss TSMC’s roadmap for the next few years. However, reports suggest that TSMC may not need these high-NA EUV equipment for mass production until at least 2030.
Nevertheless, TSMC still needs to expand production and build more foundries, so more EUV machines will be needed. ASML essentially has a monopoly in the EUV space and should continue to benefit even if its latest technology does not begin to bear fruit in a few years.
Meanwhile, Intel is considering using high NA EUV technology for production in 2027. It will be interesting to see if TSMC is willing to give Intel such a head start in using high NA EUV technology, even though it is struggling. Intel plans to invest $100 billion in adding chip manufacturing capacity in the U.S. over the next few years, receiving nearly $8 billion in direct funding and a 25% tax credit from the government.
Interestingly, while TSMC adopted this technology, Intel was late to enter EUV technology to maximize profits, which is one of the reasons why both companies are in the position they are in today. So unless you want to risk flipping the script, it’s still quite likely that TSMC will adopt high NA EUV technology sooner than 2030.
ASML is making some progress in transitioning to new technology, as well as dealing with Chinese companies pushing through orders for old technology, due to concerns that export bans on semiconductor technology could become even stricter. Nevertheless, the company should ultimately emerge as a long-term winner as the only manufacturer of EUV and high NA EUV machines. The stock is trading at a forward P/E ratio of 24 times, making the stock reasonably priced.
Jeffrey Seiler has no position in any stocks mentioned. The Motley Fool has positions in and recommends ASML, Intel, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and recommends the following options: A January 2026 $395 long call on Microsoft, a February 2025 $27 short call on Intel, and a January 2026 $405 short call on Microsoft. The Motley Fool has a disclosure policy.
