The AI bull market has arrived. Stocks are back to all-time highs thanks to a new boom in artificial intelligence (AI).
The launch of ChatGPT begins a race to become a leader in what top CEOs and major investors believe will be the next game-changing technology: generative AI. NvidiaThe company, which sells graphics processing unit (GPU) components, the backbone of the advanced computing systems needed for AI, has been the biggest winner so far. But there are some other stocks that could be winners. Let's take a closer look at two of them.
1. Micron Technologies
micron technologies (MU -1.04%) is the leader in memory chips. Historically, the company's business has been highly cyclical, swinging from boom to bust, as the semiconductor industry has tended to be sensitive to oversupply and changes in demand. Just a year ago, the company was operating at a deep loss as memory chip prices plummeted as demand for PCs and tablets slumped as it emerged from the pandemic.
But Micron is now emerging as a beneficiary of the AI boom, as memory chips play a key role in AI servers. As Micron executives explained in a recent earnings call, demand for AI servers is driving growth in high-bandwidth memory, and supplies are tight for DRAM and NAND chips, in which Micron specializes.
Due to this trend, the company expects DRAM and NAND prices to increase through 2024. It now expects record revenues and “significant improvement in profitability” in fiscal 2025.
CEO Sanjay Mehrotra also said, “We are in the very early stages of a multi-year growth phase driven by AI, as this disruptive technology transforms every aspect of business and society.” . Micron's memory and storage components are valuable for both AI algorithm training and inference capabilities, making Micron likely to be a winner in his AI space.
If the company can achieve record profits in 2025, it would surpass the $30.7 billion in revenue in 2022. At that level, Micron's price-to-sales ratio would be about 4x, making it an attractive valuation. Compared to other AI stocks.
Micron's operating profit margin reached 50% in 2019, and there is a possibility that profitability will increase. If the company's profitability soars, the stock could rise further from here.
2. Taiwan Semiconductor Manufacturing
Another tech stock that seems well-positioned to ride the AI wave is taiwan semiconductor manufacturing (TSM -0.47%). The company, known as TSMC, is the world's largest contract semiconductor foundry. The company manufactures many of the world's largest chip designers, including: appleNvidia, broadcomand Advanced Micro Devices.
TSMC commands more than 50% market share in the third-party chip manufacturing industry and has tremendous market power in the broader semiconductor industry, particularly in AI chips. It serves about 90% of the third-party market for advanced chips on which AI models depend.
TSMC's de facto monopoly on third-party chip manufacturing makes it more resilient than companies like Nvidia, which needs to maintain competitiveness and pricing power in order for its stock price to continue rising. Chip manufacturing has high barriers to entry, and TSMC's leadership is unlikely to be challenged in the coming years.
Like Micron, TSMC is emerging from an early slump in the semiconductor industry, but with the help of AI, growth is accelerating. Through his first two months of the year, revenue increased by his 9.4%, and revenue growth accelerated to 11.3%. Investors took this as a sign that demand for AI is picking up, as it was a significant improvement from flat sales growth in the fourth quarter.
TSMC is also highly profitable, further demonstrating its competitive advantage and pricing power. The company recorded an operating profit margin of 41.6% in the fourth quarter.
Finally, TSMC is reasonably priced at a price-to-earnings ratio of 28x, and profits are expected to improve with AI as a tailwind. The semiconductor manufacturing giant was already a solid company, but its economic moat appears poised to expand further in the AI era.
Jeremy Bowman has a position at Broadcom. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.