Artificial intelligence (AI) has created huge opportunities for technology companies as they use it to offer new products and services. Goldman Sachs estimates that companies will pour $1 trillion into generative AI investments over the next few years in their efforts to keep pace with each other.
All of that spending will propel some of the world’s leading AI companies forward, accelerating their growth in a surge that could last for many more years. But which ones would be the best to invest in now as the AI market takes shape? Here are two AI stocks that should be among your top contenders.
1. Broadcom
Broadcom (AVGO) is a major player in the AI market because of its application-specific integrated circuits (ASICs), many of which are now being used in AI data center infrastructure. As companies expand AI models, they need data centers capable of handling ever more sophisticated processing. Tech giants including Alphabet and Meta already rely on Broadcom’s hardware to help provide the processing power their AI software demands.
Broadcom’s top and bottom lines are already benefiting from this increased demand for advanced data center chips. Its sales increased by 44% in its fiscal 2024 to $51.5 billion, and its non-GAAP net income increased by 29% to $23.7 billion. More specifically, the company’s AI revenue spiked by 220% to more than $12 billion.
There’s likely more growth ahead for Broadcom as companies’ needs for AI processors increase. For example, in October, Broadcom reportedly began working to design an AI chip for ChatGPT creator Open AI. And Broadcom’s management said on the most recent earnings call that based on the roadmaps its large clients have already laid out, by 2027, it will have a serviceable addressable market for its custom AI accelerators and networking hardware in the range of $60 billion to $90 billion.
Broadcom currently trades at a forward price-to-earnings ratio of 38.1, which is admittedly pretty expensive compared to the S&P 500’s forward P/E ratio of 23.8. But with Broadcom already benefiting from AI demand and with more spending on the way, it’s likely that it still has more room to run.
2. Taiwan Semiconductor Manufacturing
Another angle you can take on investing in the AI trend is to buy shares of Taiwan Semiconductor Manufacturing (TSM), also called TSCM, which manufactures an estimated 90% of the world’s most advanced chips.
That dominance has led to significant growth for the company recently. In the third quarter, its sales rose 39% to $23.5 billion and earnings increased by 54% to $1.94 per American depositary receipt (ADR). Many of tech’s most important companies are utilizing TSMC’s advanced manufacturing to make the best AI processors possible, tapping into its ability to produce 3-nanometer (nm) process node chips — and its planned commercialization of 2nm process node chips in 2025.
If you’re skeptical about investing in an AI chip manufacturer rather than an AI software maker, consider that Nvidia CEO Jensen Huang, who has a lot of skin in the AI game as well, estimates that tech companies will spend $2 trillion over the next five years building out AI data centers. Even if they only come relatively close to that estimate, AI represents a massive opportunity for TSCM in the coming years.
Taiwan Semiconductor currently trades at a forward P/E ratio of just 22.8, which is much cheaper than many of the company’s AI peers and also lower than the S&P 500’s average ratio. Between TSMC’s relatively inexpensive share price and its leading position in AI chip manufacturing, adding its stock to your portfolio now and holding on for the long term could prove to be a smart move.
— Chris Neiger
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Source: The Motley Fool