These AI stocks appear well-positioned for long-term gains.
The artificial intelligence (AI) stock boom is showing signs of slowing down a bit, but that doesn't mean the opportunity for AI stocks is over.
Large corporations and startups are still increasing spending to take advantage of what many technology company CEOs and experts consider the biggest technological revolution since the Internet. Sam Altman, CEO of OpenAI, also said that demand for generative AI is still growing rapidly and new energy solutions will be needed to support it.
So it looks like AI stock still has a lot of upside potential. If you want to take advantage of this opportunity, these two stocks look like great ways to do it.
1. Taiwan Semiconductor Manufacturing
Most of the AI ​​winners right now seem to be hardware stocks, including: Nvidia Demand for GPUs and other components that make up the backbone of AI infrastructure is skyrocketing. Competition for hardware components such as GPUs and servers is expected to intensify in the future. intel and Advanced Micro Devices is launching its own competing AI GPU.
Among the companies benefiting from this increased AI competition are: taiwan semiconductor manufacturing (TSM -0.24%). Even better, it's unlikely to encounter the kind of competitive invasion faced by the hardware stocks referenced above.
TSMC (also known as TSMC) is the world's largest contract semiconductor manufacturer, dominating the market with an estimated 55% share of third-party chip manufacturing and a 90% share of advanced chip manufacturing. It is the company that largely enabled the era of fabless chip design, as favored by technology companies and chip designers. appleNvidia, AMD, and broadcom All companies rely on TSMC to manufacture their product designs. Even Intel, which has its own foundry business, can't match TSMC in advanced chip production, so it turned to TSMC to produce its new Gaudi 3 AI chips. TSMC is now able to manufacture 3nm (nanometer) chips and aims to release 2nm chips in 2025.
This market share and key position in the chip supply chain gives TSMC significant market power. The company reported an operating margin of 41.6% in its fourth quarter earnings report, indicating that it is converting a high percentage of its revenue into profits.
TSMC's growth is also accelerating thanks to the AI ​​boom, with sales increasing 34.3% year-on-year in March and 16.5% in the first quarter, the highest quarterly pace since 2022. This is proof that it is accelerating. Additionally, TSMC trades at a reasonable valuation, and the stock price could rise further as growth accelerates.
2. Arm Holdings
Here's another long-term winner in AI with the potential for a sustainable competitive advantage. arm holdings (arm -0.08%).
Arm is a chip design company, but it has a different business model than most of its competitors in the space. Rather than selling directly to end users, Arm licenses its designs and collects royalties each time a product is sold using one of its designs.
The company works closely with Nvidia and partners who are investing heavily in AI. alphabetjust announced new Arm-based Axion chips for AI for use in its cloud computing data centers.
Arm also has benefits related to what OpenAI CEO Sam Altman mentioned above. Running his AI applications like ChatGPT requires huge levels of energy, but Arm's CPUs (central processing units) are more efficient than competing x86 chips from Intel and AMD. is known. This is the main reason why Arm processors are in about 99% of smartphones, and why Arm processors are becoming the preferred choice for AI hardware. Arm CPUs are used in his Nvidia's Grace Hopper Superchip, and Arm architecture is included in his Nvidia's Blackwell platform.
Arm's business model, in which license revenue precedes royalty revenue, has seen the company's revenue decline as the company pointed to better-than-expected license revenue growth in its most recent quarter and provided impressive guidance for future growth. It also means that growth is likely to accelerate in the coming quarters. Fourth quarter.
As long as Arm can maintain its lead in CPU efficiency, it looks very likely to join the ranks of AI winners.
Suzanne Frey, an Alphabet executive, is a member of the Motley Fool's board of directors. Jeremy Bowman has a position at Broadcom. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Apple, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and Intel and recommends the following options: A long call on Intel at $45 in January 2025 and a short call on Intel at $47 in May 2024. The Motley Fool has a disclosure policy.