A once-a-decade investment opportunity: An AI semiconductor stock worth buying right now (hint: it's not Nvidia)
One of the biggest opportunities among investments in artificial intelligence (AI) is semiconductor stocksOf course, some obvious opportunities include powerhouses like Nvidia and Advanced MicrodevicesBoth companies make chipsets called graphics processing units (GPUs), which play a key role in developing generative artificial intelligence applications.
Below, I'll explain why the semiconductor sector presents such lucrative investment prospects for the coming years. I'll also break down which companies are the major players in the chip sector and share my top picks.
What is the market potential for AI-powered chips?
Chips play a critical role in the entire AI ecosystem. Some prominent use cases for AI chips include natural language processing (NLP), machine learning, and cloud computing.
According to data compiled by Precedence Research, the total global addressable market for AI-powered chips is expected to grow at a compound annual rate of 30% between 2023 and 2032, eventually reaching a size of $227 billion by the beginning of the next decade.
Who are the major players in the semiconductor industry today?
As I mentioned earlier, Nvidia and AMD are perhaps the two biggest names in AI chips right now. Additionally, other niche players include Arm holdings and Broadcom — the latter of which appears about to disturb both the software and hardware of AI chips.
However, savvy investors understand that there are other opportunities beyond the major market players. In fact, many of Nvidia's customers are investing heavily in developing their own AI chips.
Right now, Amazon and Target platforms There are two tangential opportunities for investors interested in gaining exposure to the chip market. Amazon is developing its own line of chips, dubbed 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 comprise a portion of Meta’s current capital expenditure budget.
Besides, Tesla CEO Elon Musk has even hinted at the idea of competing with Nvidia in the future. Considering how many high-calibre companies use Nvidia chips, how could he see another opportunity as superior?
Well, there is a subtle theme in all of the above examples. Namely, Nvidia is facing a rising tide of competition. Over time, I believe the company will lose its ability to command such high prices, and this will subsequently erode its dominant position in the market. For these reasons, I wouldn't be surprised to see Nvidia's growth slow down and the stock premium begin to normalize.
But fear not: There is one company I see positioned to benefit from the growth of the AI chip market, no matter which company experiences the most demand.
Why a company stands out from the rest
Semiconductor manufacturing in Taiwan (NYSE: TSM) Nvidia is one of the biggest players in the chip industry. It specializes in the chip manufacturing side of things thanks to its manufacturing facilities. You see, Nvidia and many of its peers do very little in the way of manufacturing. Instead, once new chip designs are tested and finalized, many semiconductor companies outsource their manufacturing needs to TSMC (as it is commonly known).
In fact, some of Taiwan Semiconductor's clients include Nvidia, AMD, Broadcom, Amazon Web Services, Intel, Qualcommand SonyGiven this level of diversification, I believe TSMC will benefit from the more macro secular tailwinds driving the AI chip market and not need to worry about which specific companies' chip businesses they are buying.
Perhaps the most attractive thing 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 peculiar, as TSMC is less vulnerable to competition than some of its peers.
The AI revolution is still in its early stages and chips are poised to remain a critical component of the technology’s development. Given the number of different companies investing in their own chip projects, combined with the evolution of AI use cases, I believe the chip market should continue to flourish in the coming years.
Furthermore, it can be argued that Taiwan Semiconductor is the most important chip company of all because many companies rely on its 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, as well as the stock's attractive valuation, I believe now is a great opportunity to buy shares in bulk.
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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 director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Adam Spatacco The Motley Fool 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: November 2024 $24 call options on Intel. The Motley Fool has a Disclosure Policy.
A once-a-decade investment opportunity: An AI semiconductor stock worth buying right now (hint: it's not Nvidia) Originally published by The Motley Fool
