One of the biggest opportunities in artificial intelligence (AI) investing is semiconductor stocks. Of course, there are also obvious opportunities, such as powerhouses like Nvidia And Advanced micro devicesBoth companies make chipsets called graphics processing units (GPUs), which play a crucial role in developing generative AI applications.
Below, I’ll explain why the semiconductor space offers such lucrative investment prospects in the coming years. I’ll also outline which companies are the key players in the chip space and share my top picks.
What is the market potential for AI chips?
Chips play an integral role in the AI ecosystem. Some prominent use cases for AI chips include natural language processing (NLP), machine learning, and cloud computing.
According to data from Precedence Research, the global AI chip market is expected to grow at a compound annual rate of 30% between 2023 and 2032, ultimately reaching $227 billion by early next decade.
Who are the key players in the semiconductor industry today?
As I mentioned above, Nvidia and AMD are perhaps the two biggest names in AI chips right now. There are also more niche players, including Arm Holdings And Broadcom — which looks set to disrupt both the software and hardware sides of AI chips.
However, smart investors understand that there are opportunities beyond the major players in the market. In fact, many of Nvidia’s customers are investing heavily in developing their own AI chips.
At this moment, Amazon And Meta platforms are two tangential opportunities for investors interested in chip market exposure. Amazon is developing its own line of chips, called Trainium and Inferentia. Meanwhile, Meta’s Training and Inference Accelerator could be seen as a more strategic move to migrate away from Nvidia’s H100 GPUs — which make up a portion of Meta’s current capex budget.
Furthermore, Tesla CEO Elon Musk has even floated the idea of competing with Nvidia in the future. Given the number of high-caliber companies using Nvidia chips, how can I see another opportunity as superior?
Well, there’s a subtle theme running through all of the above examples. Namely, Nvidia is facing a rising tide of competition. I think that over time, the company will lose its ability to command such high pricing power, and this will subsequently come at the expense of its market dominance. For these reasons, I wouldn’t be surprised to see Nvidia’s growth slow and its equity premium normalize.
But fear not: I see one company that can benefit from the growth of the AI chip market, regardless of which company is in most demand.
Why One Company Stands Out from the Rest
Taiwanese semiconductor production (NYSE:TSM) is one of the major players in the chip world. It is a specialist in the manufacturing side of the chip equation thanks to its production facilities. You see, Nvidia and many of its cohorts do very little in the way of manufacturing. Instead, many semiconductor companies outsource their production needs to TSMC (as it is often called) once new chip designs have been tested and finalized.
Some of Taiwan Semiconductor’s customers include Nvidia, AMD, Broadcom, Amazon Web Services, Intel, QualcommAnd SonyGiven this level of diversification, I think TSMC will benefit from the more macro secular tailwinds fueling the AI chip market and not have to worry about which companies are buying specific chip companies.
Perhaps even more appealing about Taiwan Semiconductor is its valuation. The stock’s forward price-to-earnings multiple of 25.4 is remarkably low compared to other popular chip stocks. I find this disparity odd, given that TSMC is less vulnerable to competition than some of its peers.
The AI revolution is still in its infancy, and chips are poised to remain a critical part of the technology’s development. Given the number of different companies investing in their own chip efforts, combined with the evolving AI use cases, I see the chip market as one that will continue to thrive for years to come.
Furthermore, it can be argued that Taiwan Semiconductor is the most important chip company in the world because so many companies rely on the company’s outsourcing and manufacturing capabilities.
Given the long-term growth prospects of the AI chip market and Taiwan Semiconductors’ influential role in bringing chips to life, plus the stock’s attractive valuation, I think now is a great time to buy shares en masse.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former chief market development officer and spokeswoman for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions in Amazon, Meta Platforms, Nvidia and Tesla. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon, Meta Platforms, Nvidia, Qualcomm, Taiwan Semiconductor Manufacturing and Tesla. The Motley Fool recommends Broadcom and Intel and recommends the following options: short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.
A Once-in-a-Decade Investment Opportunity: 1 Artificial Intelligence (AI) Semiconductor Stock You Need to Buy Right Now (Hint: It’s Not Nvidia) was originally published by The Motley Fool
