Artificial intelligence (AI) wouldn’t be possible without these companies.
To earn superior returns in the stock market, it helps to invest in strong companies serving growing industries, and one industry that is showing great potential for investor returns is semiconductors.
Enterprises around the world are pouring billions into data center infrastructure to prepare for growing demand for artificial intelligence (AI) services, making top chip suppliers a no-brainer investment option.
Here are two leading chip stocks that are poised to deliver tremendous gains for patient investors.
1. Nvidia
Nvidia (NVDA -0.79%) is the leading supplier of chips being used in data centers with a focus on AI. The market for generative AI, the technology behind OpenAI’s ChatGPT, could grow 43% per year to reach $1.3 trillion by 2032, according to Bloomberg Intelligence. This massive opportunity is why Nvidia commands a market cap of $2.8 trillion and could grow more valuable over time.
Nvidia is the leading supplier of graphics processing units (GPUs), which are used by leading AI developers like OpenAI to train AI models. The demand for its H100 GPU helped drive a 262% year-over-year increase in the company’s revenue last quarter.
Total revenue is expected to grow 81% this year to reach $$110 billion, according to the current consensus on Wall Street. The company continues to innovate and expand into new markets, such as other chip products and networking components, to help companies build AI-optimized data centers, and this could take years to play out.
It’s a massive advantage for Nvidia that it can fulfill growing demand. These powerful AI chips have been in short supply, but over the last year, the company’s quarterly data center revenue jumped from $4.2 billion to $22.5 billion. Customers are investing in more GPUs, and it is the only supplier that can fill this demand right now.
Its continuous innovation in GPU technology will keep it in the lead. Its new H200 GPU system nearly doubles the performance of the H100, and management said on the earnings call in May that demand is already tracking ahead of supply. The stock could hit new highs as Nvidia continues to report robust growth.
2. Taiwan Semiconductor Manufacturing
Taiwan Semiconductor Manufacturing (TSM -1.25%) makes chips for Nvidia and other leading chip companies. It is a very profitable business with a market cap of $795 billion.
TSMC, as it is also known, invests in the equipment to build advanced processors so that its customers don’t have to. It generated $27 billion in net profit on $71 billion of revenue over the past year. The company’s high margins are helping it expand its manufacturing footprint globally to help meet the growing demand for cutting-edge chip technologies.
Its customers need more advanced computing power to train AI models and run generative AI applications like OpenAI’s ChatGPT. As the leading chip foundry, TSMC has a solid competitive advantage in being able to meet this demand.
Now is a particularly good time to consider buying the stock, because TSMC is just coming out of a sales slump. Revenue growth dipped in 2023 due to softness in certain end markets like smartphones, but revenue is starting to accelerate again. Further AI demand and a potential rebound for smartphone chips could lift the stock to new highs over the next several years.
Since 2012, revenue in the semiconductor industry has increased from $300 billion to an expected $631 billion this year. The emergence of AI is a long-term catalyst for the latest chip technologies, which is a powerful tailwind for TSMC.
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.
