Demand for artificial intelligence (AI) is driving big gains in major semiconductor stocks. These companies play a pivotal role in the adoption of this technology, and there is still an opportunity for investors to profit. Statista predicts that the AI chip market will grow more than 30% in 2024, significantly outpacing the broader semiconductor industry’s 16% growth.
Here are two stocks that are best positioned to profit from this opportunity.
1. Nvidia
Nvidia (NVDA -3.22%) As of this writing, the stock is up 186% year-to-date, but despite this impressive rise, investors don’t need to feel like they’ve missed the boat. Demand trends for the graphics processing unit (GPU) leader are strong and these are expected to carry through to 2025, according to the company’s latest earnings report.
“The age of AI is in full swing, driving the global transition to Nvidia computing,” said CEO Jensen Huang. In its fiscal third quarter, the company beat its own guidance, with sales up 94% year-over-year to $35 billion.
While investors wait for the company’s new AI computing platform, Blackwell, which is currently in production, it’s encouraging that demand for Nvidia’s Hopper chips remains strong. Nvidia reported strong sales growth for its H200 chips this quarter, the fastest product increase in the company’s history.
Blackwell will be a big driver of growth next year. “Demand for Blackwell has been incredible, and we are rushing to expand supply to meet the incredible demand our customers are placing on us,” said CFO Colette Kress. It is not a chip, but a customizable computing platform that includes various types of chips to provide the computing power needed for generative AI workloads, one of today’s major trends in high-performance computing. According to benchmark tests, Blackwell can deliver 2.2x more performance compared to Hopper-based chips.
While some investors may think the company’s $3.5 trillion market cap is expensive, the company’s valuation appears reasonable when you compare the stock to Wall Street’s earnings expectations. . Over the next few years, analysts’ consensus forecast is for the company’s profits to grow at an annual rate of 37%. With the stock trading at 34 times next year’s expected earnings, the stock still has the potential to provide investors with a market-beating return.
2. Taiwan Semiconductor Manufacturing
Taiwan Semiconductor Manufacturing Stock (TSM -0.61%) This is an increase of 91% compared to last year. The company makes chips for Nvidia and other chip companies, so it benefits from similar demand trends in high-performance computing.
Third-quarter revenue increased 36% year over year, and the company’s high margins fueled further revenue growth, with profits increasing 54%. TSMC attributed the quarter’s strong performance to AI-related demand, which may be stronger than investors expected. Management said revenue contribution from AI server chips is expected to triple for the full year.
“As strong structural AI-related demand continues, we continue to invest to support our customers’ growth,” CFO Wendell Huang said on the company’s third-quarter earnings call. It’s a good sign that the company expects capital spending to rise to more than $30 billion for the year, as it must invest now to prepare for demand later.
The company plays an important role in global chip supply. According to Counterpoint Research, the company controlled 62% of the global foundry market in Q2 2024, and its market share has increased slightly over the past two years. Investment in AI servers is expected to increase significantly over the next decade, and TSMC has a bright future.
The company’s stock has a forward price/earnings ratio (P/E) of 27x in 2024, and just 21.5x in next year’s consensus. TSMC stock remains a solid buy, with analysts forecasting 31% annualized earnings growth.
John Ballard has a position at Nvidia. The Motley Fool has positions in and recommends Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
