The skyrocketing demand for artificial intelligence (AI) is catalyzing remarkable advancements for top chip stocks, creating a unique investment landscape. Companies within this sector are crucial to the widespread adoption of AI technologies, presenting lucrative opportunities for savvy investors. According to Statista, the AI chip market is projected to expand by more than 30% in 2024, significantly outpacing the broader semiconductor industry, which is anticipated to grow at a modest rate of 16%. This divergence highlights the potential for substantial returns for those who strategically invest in this burgeoning market.
Below are two of the most promising stocks that investors can consider to capitalize on this opportunity.
1. Capitalize on Nvidia’s Market Leadership in AI Technology
Nvidia (NVDA -3.22%) shares have surged an impressive 186% year-to-date, signaling robust investor confidence. However, even with this remarkable performance, it’s essential for potential investors to recognize that there are still opportunities to enter this dynamic market. The company’s recent earnings report confirms that demand for their cutting-edge graphics processing units (GPUs) remains exceptionally strong, with expectations for continued momentum into 2025 and beyond.
“The age of AI is in full steam, propelling a global shift to Nvidia computing,” stated CEO Jensen Huang. In fiscal Q3, the company not only met but exceeded its own revenue guidance, achieving a remarkable 94% year-over-year growth, reaching an impressive $35 billion. This demonstrates the company’s ability to innovate and adapt in the fast-evolving tech landscape.
While investors await the launch of Blackwell, Nvidia’s upcoming AI computing platform, it is reassuring to note that demand for the company’s Hopper chips remains robust. Nvidia reported substantial growth in H200 chip sales during the quarter, marking the fastest product ramp in the company’s extensive history. This solid performance indicates a strong foundation for future expansion.
Looking ahead, Blackwell is poised to be a significant driver of growth in 2024. CFO Colette Kress remarked, “Blackwell demand is staggering, and we are racing to scale supply to meet the incredible demand customers are placing on us.” Unlike traditional chips, Blackwell is a customizable computing platform designed to deliver the computational power necessary for generative AI workloads, a major trend in high-performance computing today. Benchmark tests suggest that Blackwell can outperform Hopper-based chips by an impressive 2.2 times.
While some investors may perceive Nvidia’s $3.5 trillion market cap as daunting, a closer look reveals a reasonable valuation when comparing the share price to Wall Street’s earnings estimates. Analysts project that the company’s earnings will grow at an annualized rate of 37% over the next few years. With the stock currently trading at 34 times next year’s earnings estimate, Nvidia still holds potential for delivering market-beating returns for discerning investors.
2. Unlocking Growth Potential with Taiwan Semiconductor Manufacturing
Shares of Taiwan Semiconductor Manufacturing (TSM -0.61%) have risen by 91% over the past year, capitalizing on the increasing demand for chips, particularly from industry leaders like Nvidia. As a key supplier, TSMC is benefitting from the same trends driving high-performance computing, making it a compelling investment choice.
In the third quarter, TSMC reported an impressive 36% year-over-year revenue growth, bolstered by high profit margins that have propelled earnings up by 54%. The company’s strong performance is largely attributed to AI-related demand, which appears to be exceeding initial investor expectations. Management has indicated that the revenue contribution from AI server chips is on track to triple by year-end, underscoring the significance of AI in their growth strategy.
“As the strong structural AI-related demand continues, we continue to invest to support our customers’ growth,” stated CFO Wendell Huang during the Q3 earnings call. Recognizing the need for future capacity, TSMC plans to invest significantly, with capital expenditures projected to exceed $30 billion this year. This proactive investment strategy is indicative of the company’s commitment to sustaining growth in a competitive landscape.
TSMC plays a vital role in the global semiconductor supply chain, controlling an impressive 62% of the global foundry market as of Q2 2024, according to Counterpoint Research. This market share has slightly increased over the past two years, reflecting the company’s strong position. With expectations for substantial growth in AI server investments over the next decade, TSMC is well-positioned for long-term success.
Currently, TSMC shares trade at a forward price-to-earnings ratio of 27 based on 2024 estimates, and a remarkably lower 21.5 on next year’s consensus. With analysts forecasting annualized earnings growth of 31%, TSMC stock remains an attractive investment opportunity for those looking to capitalize on the ongoing AI revolution.
John Ballard has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
