Why Broadcom and TSMC are likely AI chip winners.
The hottest artificial intelligence (AI) stock is undoubtedly Nvidia, whose graphics processing units (GPUs) are the backbone of building AI infrastructure. But as companies rush to compete, spending in the space remains frenetic, and Nvidia won’t be the only winner.
Nvidia is a great stock, but I’d like to highlight two more companies that have a lot of upside potential thanks to the benefits of AI.
broadcom
Nvidia is the leader in mass-market GPUs, but Broadcom (AVGO -3.14%) aims to become the leader in customized AI chips. These are application-specific integrated circuits (ASICs) that are specifically designed to meet the exact needs of the customer. These chips are created to run specific AI workloads, making them more efficient than typical GPUs.
Broadcom’s first customer in this space was Alphabet, which helped design and deliver the key technology for tensor processing units (TPUs). These TPUs are currently used for both AI training and inference. Alphabet differentiates its TPUs from GPUs by having several special features, including matrix multiplication units (MXUs) and a unique interconnect topology that is ideal for accelerating AI training and inference. I claim that there is.
The company announced this year that it added a large AI chip customer, believed to be China’s ByteDance, which operates Metaplatform and TikTok. ByteDance needs its AI chips to comply with U.S. export regulations, as Nvidia’s cutting-edge GPUs are not allowed to be shipped to China. Meanwhile, Meta values its strategic relationship with Broadcom so much that it added the CEO to its board of directors earlier this year.
There are also multiple reports that OpenAI is set to become Broadcom’s fourth major AI chip customer. OpenAI is said to be in talks with the company to design its own chip. There are also rumors that the company has secured a fifth customer for its AI ASIC, planned for 2026.
Custom AI chips are a large and growing market, which is driving Broadcom’s AI revenue forecast to increase, from $7.5 billion at the beginning of the year to now just $12 billion. With the addition of new customers, this represents a huge opportunity for the company in the coming years.
Image source: Getty Images.
Broadcom also benefits from providing network components used to build AI data center infrastructure. The company believes its Ethernet switches will be central to processing AI workloads and transferring data between GPUs, and believes the importance of switching will become more important as GPU clusters grow.
AVGO PE Ratio (Forward 1y) Data by YCharts
While Broadcom has a huge AI opportunity in front of it, it trades at an attractive price of less than 28 times forward earnings, based on next year’s analyst forecasts and P/E. are. (PEG) ratio is 0.75. Generally, stocks with a PEG below 1 are considered undervalued, and growth stocks often have a PEG ratio much higher than 1.
Given the company’s valuation and growth prospects, Broadcom stock looks like it could be the next big AI winner.
taiwan semiconductor
taiwan semiconductor manufacturing (TSM -4.73%)abbreviated as TSMC, is the world’s largest semiconductor contract manufacturing company and plays a critical role in the chip manufacturing process. The company makes chips for most of the top semiconductor companies, including Nvidia and Broadcom, but its biggest customer is Apple, which designs its own chips for use in its devices.
As such, the company is benefiting from the proliferation of chips needed both to build out AI infrastructure and the accompanying hardware upgrade cycles for smartphones and other devices. By and large, it doesn’t matter who wins the AI chip race, since most of the major companies are AI chip customers.
Given the insatiable demand for chips, it’s no surprise that TSMC’s services are in high demand, and the company is working to expand its production capacity to meet this growing demand. Meanwhile, so far, large technology companies continue to ramp up investments in AI infrastructure, as large-scale language models (LLMs) become more sophisticated and require more computing power. , there is no sign that demand is slowing down.
Demand for AI chips is so high that production capacity at TSMC’s foundries is strained, giving the company significant pricing power. Morgan Stanley said the company plans to raise prices by 10% for AI semiconductors and chip-on-wafer-on-substrate products, 6% for high-performance computing and 3% for smartphones.
TSM PE Ratio (Forward 1y) Data by YCharts
The combination of increased ability to meet demand and strong pricing power will make TSMC one of the biggest beneficiaries of AI in the coming years. On the other hand, the stock trades relatively cheaply, with a forward P/E ratio of around 21x and a PEG ratio of just over 1x, based on next year’s analyst forecasts. Given the solid outlook, it looks like a solid buy at current levels.
Suzanne Frey, an Alphabet executive, is a member of the Motley Fool’s board of directors. Randi Zuckerberg is a former head of market development and spokesperson at Facebook, sister of Meta Platforms CEO Mark Zuckerberg, and a member of the Motley Fool’s board of directors. Geoffrey Seiler is with Alphabet. The Motley Fool has positions in and recommends Alphabet, Apple, Meta Platforms, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
