Nvidia (NASDAQ: NVDA) has become the dominant force in the AI data center chip industry. As major tech companies ramp up spending on new artificial intelligence (AI) models, Nvidia’s advanced graphics processing units (GPUs) have been critical to their need for fast computing power.
Nvidia controls an estimated 80% of the AI chip market. As a result, its stock price has skyrocketed: last summer it joined the $1 trillion club when it reached a market value of $3 trillion on June 5. Of the few companies with a market capitalization of $1 trillion or more, it is the only one that focuses exclusively on the market. on semiconductors.
Still, two other semiconductor companies benefiting from the current AI trend could soon join Nvidia in that higher end of mega-cap stocks. Aided by several growth engines beyond AI, they could have a lot of staying power once they join the $1 trillion club.
1. Semiconductor manufacturing in Taiwan
Taiwanese semiconductor manufacturing (NYSE: TSM), or TSMC, is the largest semiconductor foundry in the world. Most semiconductor companies today don’t produce the chips they design. Companies like Nvidia outsource that process to manufacturing specialists like TSMC.
TSMC is taking on major capital expenditures and engineering R&D expenditures to build factories capable of printing ever-faster, more powerful and more energy-efficient chips – and it’s making more of them than anyone else. This has created a virtuous cycle: because it offers industry-leading capabilities, it receives more revenue from chip designers. The profits generated by these deals allow the company to reinvest more in the next generations of production processes.
Because TSMC’s processes can be applied to semiconductors for a variety of applications, the foundry is not dependent on a specific case like artificial intelligence to support demand for its services. Instead, the endless march toward faster and more energy-efficient computers is driving demand for manufacturing capacity.
That said, AI has certainly been a catalyst for TSMC lately. Management has forecast that AI-related revenues will grow at a compound annual rate of 50% over the next five years. The company expects AI chips to account for more than 20% of total sales by 2028.
With AI driving growth for TSMC, analysts expect the company to grow at an annual rate of over 20% over the next five years. While that won’t match the notable recent growth of some chip designers like Nvidia, TSMC is in a much more predictable and stable business because it serves a much broader customer base. The forward price-to-earnings ratio of 26.5 is a fair price for the stock.
Its market capitalization is currently approximately $685 billion. It would need to rise by about 46% to reach the $1 trillion mark, which is unlikely to happen anytime soon. But TSMC’s steady growth makes it a shoo-in to achieve that long-term goal. And based on management’s expectations for growing AI-related revenues, “the long term” may only last a few years.
2. Broadcom
Broadcom (NASDAQ:AVGO) is one of the largest chipmakers in the world, with a broad portfolio of designs for different end markets. AI has been a driving force behind results lately, with AI revenues quadrupling year over year during the first quarter of 2024.
Broadcom builds AI chips with a focus on overcoming the networking challenges of moving large amounts of data. As AI data center clusters grow, it becomes increasingly important to ensure that data can move quickly and efficiently from one processor to another. This allows big tech companies to get the most out of the expensive GPUs they spent billions of dollars purchasing or developing. As the size of these networks grows, demand for Broadcom’s chips could increase exponentially.
But the semiconductor business has diversified beyond AI. It also makes chips for smartphones, broadband access and data storage. It produces best-in-class networking chips for smartphones and broadband that require advanced technical capabilities, which has helped it gain a majority share in the markets in which it operates. This leads to a virtuous cycle, allowing the company to reinvest in R&D to improve its products and stay ahead of the competition. The company spent more than $5 billion on R&D last year.
Broadcom also has a software company that includes the recently acquired VMWare. The deal with VMWare strengthened its position in virtualization and mainframe software, which complement software for security, DevOps and more. It often manages to win sales for multiple solutions: 80% of its customers use five or more of its services.
AI should drive strong growth for Broadcom in the coming years as major tech companies continue to spend heavily on data centers. The company is building a stable foundation with its existing wireless, network and software activities. That should support strong growth, and margins should increase after VMWare is fully integrated.
Broadcom’s stock currently trades at about 30 times forward earnings. This valuation should be supported by strong growth over the next five years. Based on its current market cap of $650 billion, Broadcom appears poised to join the $1 trillion club within that time frame.
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Adam Levy holds positions in Taiwan Semiconductor Manufacturing. The Motley Fool holds positions in and recommends Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
Two artificial intelligence (AI) semiconductor stocks that could join Nvidia in the $1 Trillion Club were originally published by The Motley Fool
