Semiconductor Giants Poised for Growth Amid AI Boom

Better Artificial Intelligence Stock: Applied Materials vs. ASML | The Motley Fool

Artificial intelligence (AI) is a growing industry worth your investment dollars. One way to invest in this sector is to buy shares in businesses playing an essential role in the AI market. Two such companies are Applied Materials (AMAT -1.91%) and ASML (ASML -2.44%). Both supply machines to manufacture the microchips that make AI possible and are two of the world's biggest providers of this semiconductor equipment. ASML specializes in lithography machines, which apply the blueprint of a microchip onto a silicon wafer. Applied Materials is known for the tools used in other steps of the microchip manufacturing process, such as metrology and inspection systems to ensure chips are defect-free. Both play crucial roles in the AI ecosystem, but if you had to choose between them, which one is the superior AI stock? Applied Materials management sees tremendous long-term business opportunities thanks to the secular trends involving semiconductor components. Many markets now rely on semiconductors, including electric vehicles (EVs), robotics, solar and other renewable energy, and AI. The company's products are poised to remain in demand for years as the equipment evolves to meet increasingly complex needs. For example, semiconductor manufacturers are starting to adopt Gate-All-Around (GAA) manufacturing technology to construct microchip transistors. The Fin Field-Effect transistor architecture is widely used today, but GAA is the evolution of this approach. It's aimed at improving the performance, power efficiency, and density of transistors. Applied Materials generated $2.5 billion in revenue from GAA in its 2024 fiscal year, ended Oct. 27, and expects to double that in fiscal 2025. Overall, the company's sales grew 2% year over year in fiscal 2024 to $27.2 billion, the fifth consecutive year of revenue growth. However, a Morgan Stanley analyst downgraded the company's stock in December, expecting weak demand to weigh on the company's 2025 revenue. One factor involves U.S. government restrictions on semiconductor-related sales to China. China is one of the company's most important markets. But for now, Applied Materials expects fiscal Q1 sales to reach around $7.2 billion, an increase from the prior-year's $6.7 billion. ASML is not only a major supplier of lithography equipment to the semiconductor industry, but it's also the only company in the world today to sell the most advanced lithography technology, called extreme ultraviolet (EUV) lithography. EUV machines are the sole means of manufacturing the most advanced microchips, ones that can produce powerful yet energy-efficient AI. This gives ASML a competitive advantage. Even so, its stock price declined after announcing third-quarter results on Oct. 15. The company's Q3 revenue was $7.5 billion, up 20% from 2023's $6.2 billion, which is excellent growth. However, ASML management delivered a disappointing outlook. The company expects to finish fiscal 2024 with 28 billion euros in revenue, a small increase over 2023's 27.6 billion euros. The macroeconomic factors weighing on Applied Materials is also impacting ASML. Moreover, management estimates the current weak demand in the semiconductor industry, outside of AI, will extend into 2025. CEO Christophe Fouquet stated, "[O]ther market segments are taking longer to recover." This dour outlook contributed to ASML's shares being down about 6% in 2024. However, the company's near monopoly in lithography machines positions it to succeed over the long run once the semiconductor market rebounds from its current softness. After all, the semiconductor sector is a cyclical industry, so a downturn eventually is followed by an upswing. ASML's sales to the China market are expected to be around 20% of total revenue in 2025, which is the company's historical trend. Over the long term, ASML predicts it will hit between 44 billion euros to 60 billion euros by 2030. While current macroeconomic factors are a short-term headwind for Applied Materials and ASML, over the long run both are poised to benefit from years of growth in demand from the AI, EV, and other industries reliant on semiconductors. Therefore, it's ideal to invest in both companies. But if I had to choose one, Applied Materials is the better AI investment. The tie-breaker comes down to stock valuation. To assess this, here's a look at each company's price-to-earnings (P/E) ratio, a widely used metric that tells you how much investors are willing to pay for a dollar's worth of earnings. The chart shows that Applied Materials and ASML have seen a drop in their P/E ratios from earlier in the year. However, the former's P/E multiple is considerably lower than ASML's at the time of this writing. This suggests that Applied Materials shares are the better value. Its stock valuation, combined with the long-term secular trends that can offset a potential decline in sales to China, make now a good time to pick up Applied Materials stock.

Better Artificial Intelligence Stock: ASML vs. Taiwan Semiconductor | The Motley Fool

Artificial intelligence (AI) has been a boon to the semiconductor industry. The need for faster, more powerful chips to fuel AI enabled the industry's sales to hit $627 billion in 2024, a 19% year-over-year increase. Two companies critical to the production of semiconductor chips are ASML (ASML -0.18%) and Taiwan Semiconductor Manufacturing (TSM -0.50%), popularly known as TSMC. The former produces lithography equipment used in making microchips for AI. TSMC is one of its customers and a key chip manufacturer for businesses such as Nvidia. Given their crucial roles in the industry, does one win out as a better investment to capitalize on AI's growth? Let's dig into ASML and TSMC to find out. ASML is a compelling investment because AI likely wouldn't exist without its lithography tools. The company's machines etch extremely fine patterns onto semiconductor wafers to create transistors and other circuit elements. Moreover, ASML's latest innovation, extreme ultraviolet (EUV) lithography, is used to make the most advanced semiconductor chips available today. EUV also delivers another key benefit -- energy cost reduction. AI systems require massive amounts of energy to operate, making them prohibitively expensive over time. ASML's machines enable the manufacturing of smaller, more advanced transistors. This allows for higher transistor density, creating more powerful chips in terms of computational performance per watt. In other words, you get more processing power for lower energy consumption. ASML is the sole supplier of EUV lithography equipment. Despite the monopoly, ASML shares are down about 7% in 2024 through the week ended Dec. 20. The decline was due to underwhelming guidance as the company noted a number of factors weighing on near-term earnings. Macroeconomic conditions are causing softer demand, and geopolitical tensions are limiting its access to the China market. As a result, the company expects 2024 sales to come in at 28 billion euros ($29 billion), which is not much higher than the previous year's 27.6 billion euros ($28.7 billion). However, ASML believes growth in AI will contribute to reigniting the company's sales over the long term. It expects its revenue will rise to at least 44 billion euros ($45.8 billion) by 2030. TSMC is a customer of ASML and uses its EUV machines to produce semiconductor chips that employ three-nanometer (nm) process technology. The 3nm chips represent the latest frontier in semiconductor manufacturing, offering a significant leap in terms of performance and power efficiency. These chips are crucial for AI, cloud computing, and more. However, they are extremely difficult to manufacture due to the complexities of controlling quantum effects at microscopic scales. TSMC has mastered 3nm manufacturing, giving it a significant advantage over competitors. TSMC's 3nm-related revenue is growing quickly thanks to the benefits this technology affords AI systems. In the third quarter, TSMC's 3nm revenue represented 20% of its $23.5 billion in total sales, up from just 6% in the prior year. This growth coincides with the demand spurred by the onset of generative AI. TSMC's 3nm sales are likely to continue expanding. The AI market is still in its infancy. Forecasts predict the industry will reach $827 billion by 2030, up from $136 billion in 2023. This growth provides a tailwind to TSMC. In fact, the company's 2024 year-to-date sales through the end of November are up 32% from 2023. As a result, Q4 revenue is expected to hit at least $26.1 billion, a substantial jump up from the prior year's $19.6 billion. ASML and TSMC have a symbiotic relationship. As sales of TSMC's 3nm chips increase, it may turn to ASML to purchase more equipment to support its sales growth. So both stocks are worth owning. But since we're deciding between the two, the better AI investment choice right now is TSMC. A key factor is the stock's valuation. Here's a look at their price-to-earnings (P/E) ratio, which tells you how much investors are willing to pay for a dollar's worth of earnings. Although TSMC's share price increased 90% in 2024 through the week ended Dec. 20, the chart reveals that the stock's P/E multiple remains lower than ASML's, indicating TSMC shares are a better value. TSMC is also the manufacturer of chips for some of the largest businesses in the world. Along with Nvidia, customers include Amazon-owned cloud leader Amazon Web Services (AWS), which is looking to TSMC to build a custom AI chip using 3nm technology. Taiwan Semiconductor is well-positioned to capitalize on the AI industry's expansion over the long term. The firm is estimated to manufacture 95% of the world's advanced chips for AI. Given this market share, it's no wonder tech giants rely on TSMC for chips. These factors make it a great stock to add to your portfolio.

Taiwan Semiconductor Manufacturing vs. ASML: Which Stock Will Outperform in 2025? | The Motley Fool

Both Taiwan Semiconductor Manufacturing (TSM -0.70%) and ASML (ASML -0.32%) play critical roles in the semiconductor industry. Taiwan Semiconductor, or TSMC for short, is the world's leading semiconductor contract manufacturer. Given the cost to build manufacturing facilities (called fabs or foundries), the high capacity utilization needed for foundries to run profitably, and the technological expertise needed, most semiconductor companies prefer to just design chips and hire a third party to manufacture them. This is where TSMC fits in. ASML, meanwhile, makes the equipment that companies like TSMC use to manufacture semiconductors. While it has competitors, it is considered to have a near monopoly on extreme ultraviolet (EUV) lithography, which are highly complex machines used to create advanced chips. This year, TSMC's stock has been the clear winner, up more than 90% as of this writing. ASML's stock, meanwhile, has fallen about 5% in 2024. Let's look at which stock could be set to outperform in 2025. TSMC has been a big beneficiary of the overall proliferation of chips as well as the artificial intelligence (AI) infrastructure boom. The company's technological expertise has vaulted it to the forefront of advanced chip manufacturing. As such, the biggest chipmakers in the world, including Apple, Nvidia, and Broadcom, rely on it to manufacture their most advanced chips. Surprisingly, the AI chip boom has not helped all chip manufacturers, as TSMC's biggest rivals, Intel and Samsung, have struggled. This has allowed the company not only to gain share, but also to exert strong pricing power. In turn, this led to a strong gross margin for TSMC. TSMC saw strong growth this year, including seeing its third-quarter revenue jump 36% year over year to $23.5 billion. Meanwhile, its gross margin improved by 460 basis points sequentially to 57.8%, which helped lead to a 50% year-over-year increase in its earnings per American depositary receipt (ADR). 2025 is also setting up to be another good year for the company. According to Morgan Stanley, the company is set to nicely increase prices in 2025. Meanwhile, given the demand for AI and other chips, TSMC has been expanding to try to help companies like Nvidia keep up with demand. It also just announced its new fab in Japan had started mass chip production. TSMC's expansion should presumably help ASML, as it is one of its big three customers along with Samsung and Intel for its newer technology. But the company has called 2024 a transition year as it moves to its next-generation high-NA EUV technology. This transition appears to have slowed some orders. TSMC, meanwhile, has also balked at the high price of the new ASML machines (prices range from $350 million to $380 million per machine), but it is now expected to receive a machine by year-end. However, it has said it doesn't need the technology for producing current high-end chips, and it looks like it won't use the machines for mass production until at least 2030. Intel has been the company most receptive to ASML's new technology, being the first to get a new high-NA EUV technology machine, but its foundry business has struggled. Revenue fell for the segment last quarter, while losses have been mounting. The company is now in a bit of disarray following the retirement of its CEO in early December and reports it is looking to spin off its foundry business. As one of its big three customers, ASML could be affected. Nearly half of ASML's revenue in 2024, meanwhile, has come from China. This is despite the fact that the company is prohibited from selling its newer chipmaking technology to the country. This is a big shift from recent years, as China was just 9% of its revenue in the fourth quarter of 2022. This could be the result of Chinese companies rushing to get equipment on fears that export bans could expand to even older technology. While all this has led to some uncertainty surrounding ASML, the company is still basically a monopoly for high-end semiconductor equipment, and as chip production continues to grow, it should eventually benefit. From a valuation standpoint, TSMC is the cheaper stock trading at a forward price-to-earnings (P/E) ratio of around 22, while ASML's forward P/E currently sits at 29. TSMC has also been growing its revenue more quickly, up 36% last quarter versus 12% growth for ASML. While TSMC is the cheaper stock growing more quickly, I wouldn't count ASML out. The semiconductor equipment business can be a bit lumpy, but this is a company with a virtual monopoly on high-end chipmaking machines in a market that is seeing continued increasing demand for advanced AI chips. Over the long term, it is set to be a winner. That said, for next year, TSMC edges it out as my pick. Fortunately, investors don't have to pick one or the other and can feel comfortable buying both for 2025.

Better Artificial Intelligence Stock: Taiwan Semiconductor Manufacturing vs. Nvidia | The Motley Fool

These two companies are AI leaders in their respective fields, and their share price gains have trounced the market over the past year. But which company is the better artificial intelligence stock right now? Let's dive in and take a look. There are many ways to invest in AI's growth, and one of the most unique is semiconductor manufacturing. While it may not sound as flashy as a company creating an advanced AI chatbot, the results speak for themselves. Taiwan Semiconductor's sales increased 36% in the third quarter (ending Sept. 30) to $23.5 billion, and its earnings spiked 54% to $1.94 per American depository receipt. That growth was spurred on by large tech companies investing heavily in new AI chip production. Taiwan Semiconductor CEO C. C. Wei said on the company's latest earnings call that "Almost every AI innovator [is] working with us." The company's unique opportunity stems from its advanced manufacturing techniques, which include producing 3-nanometer chips, and it will ramp up production of 2nm semiconductors beginning in 2025. Its lead in semiconductor manufacturing has given it a 90% market share in making the world's most advanced processors. Taiwan Semiconductor is benefiting as the world's largest tech companies ramp up their AI infrastructure spending and compete to release the most advanced artificial intelligence services. Goldman Sachs estimates spending on AI will reach $1 trillion over the next few years, which should continue to fuel Taiwan Semiconductor's growth. Unlike Taiwan Semiconductor, Nvidia focuses on designing, not manufacturing, the semiconductors powering AI data centers. Nvidia's GPUs have long been a preferred choice among tech companies needing high-powered AI data centers, and demand has skyrocketed recently. Nvidia's sales soared 94% in the third quarter (ended Oct. 27) to $35.1 billion, and its non-GAAP earnings rose 103% to $0.81 per share. The driving force behind those impressive results was the company's 112% increase in data center revenue compared to the year-ago quarter, reaching $30.8 billion. Like Taiwan Semiconductor, Nvidia is riding a massive wave of investments as companies build new AI infrastructure. Nvidia CEO Jensen Huang estimates that spending in this segment will reach $2 trillion over the next five years, giving his company an unprecedented opportunity to benefit. While Nvidia's rivals will no doubt grab some of this AI spending as well, the company is well-positioned to be the biggest winner. Nvidia's chips are in an estimated 70% to 95% of AI data centers, giving it a huge advantage as AI infrastructure spending ramps up. You probably won't go wrong by investing in either of these stocks. Both Nvidia and Taiwan Semiconductor etched out a lead in their respective markets years before the AI boom took off. However, since this is a comparison of the best AI stock, I'm going to pick Taiwan Semiconductor for this match-up because its shares are technically less expensive than Nvidia's right now. Taiwan Semiconductor has a forward price-to-earnings ratio of 23.0, compared to Nvidia's forward P/E ratio of 32.7. Both stocks continue to have huge potential as AI grows, but if you're looking for a slightly less expensive stock, then Taiwan Semiconductor is the better choice.

Missed Out on Palantir's Run-Up? My Best Artificial Intelligence (AI) Stock to Buy and Hold. | The Motley Fool

Palantir Technologies (PLTR 2.09%) stock has been on a tearing run on the market in 2024, logging remarkable gains of 370% as of this writing. The rapid uptake of artificial intelligence (AI) software solutions by organizations and governments played a central role in this terrific surge. So, if someone bought just $100 worth of Palantir stock at the end of 2023, their investment would now be worth $470. However, if you're one of those who missed buying Palantir before its 2024 surge began and are skeptical of investing in the stock now because of its expensive valuation, there is a nice alternative to consider in the form of Taiwan Semiconductor Manufacturing (TSM -0.50%). Popularly known as TSMC, shares of this Taiwan-based foundry giant nearly doubled in 2024. The good part is that this semiconductor giant can still be bought at a reasonable valuation, and investors may want to do that right away, as the crucial role it plays in the chip industry could send it soaring in 2025 as well. Let's examine the reasons TSMC is one of the best AI stocks you can buy and hold right now. The proliferation of AI is driving robust demand for chips deployed in data centers for training and inference purposes, and this has turned out to be a boon for TSMC. Fabless chipmakers, such as Nvidia, Advanced Micro Devices, Broadcom (AVGO 3.15%), and Marvell Technology, that are designing graphics processing units (GPUs) and application-specific integrated circuits (ASICs) for use in AI data centers, have been using TSMC's fabrication plants to get their chips manufactured. This is why the Taiwan-based company witnessed a big jump in its revenue so far in 2024. In the first 11 months of the year, TSMC's revenue increased by 32% from the prior year. That's a big improvement over the 9% drop to $69.3 billion TSMC witnessed in its top line in 2023. TSMC management expects to record 30% revenue growth for 2024 in U.S. dollar terms, which would bring its top line to $90 billion for the year. The good part is that consensus estimates are also projecting healthy growth in the company's top line for the next couple of years. However, recent comments from major AI chipmakers indicate that TSMC could very well exceed the market's expectations going forward. Broadcom, for instance, generated $12.2 billion in revenue from sales of AI chips in fiscal 2024, up 220% from the preceding year. The company believes its serviceable addressable market in custom AI processors and networking chips could range between $60 billion and $90 billion by fiscal 2027. That's higher than what certain analysts were expecting. Earlier this year, Morgan Stanley pegged Broadcom's revenue opportunity in custom AI chips at $20 billion to $30 billion, stating that this market is capable of growing at a 20% compound annual growth rate. Based on that growth rate, the custom AI chip market would have grown to $51 billion in three years at the higher end of the forecast range. So, Broadcom management's latest comments suggest that the opportunity could be much larger. More importantly, Broadcom is working with TSMC and using the latter's advanced chip packaging capability to push the envelope in the custom AI chip market to bring more powerful processors capable of delivering better performance. On the other hand, TSMC will likely keep benefiting from the strong demand for GPUs deployed in data centers. AMD management pointed out on the October 2024 earnings conference call that the size of the AI accelerator market could grow at an annual rate of 60% and hit $500 billion in 2028. Nvidia, on the other hand, is seeing a $1 trillion revenue opportunity in the data center market thanks to the shift from general-purpose computing to GPU-powered accelerated computing. Unsurprisingly, TSMC is busy boosting its capacity so that it can churn out more chips to meet the demand from these customers for AI chips. According to Taiwan-based financial newspaper Commercial Times (via TrendForce), TSMC is expected to double its advanced chip packaging capacity to 70,000 wafers per month in 2025, followed by a further increment to 90,000 wafers per month in 2026. The improved capacity should allow TSMC to fulfill more orders from customers that are churning out AI chips and eventually maintain robust growth in its top and bottom lines. The red-hot surge in Palantir's stock has made it quite expensive. More specifically, Palantir has a price-to-earnings ratio of 411, along with a forward earnings multiple of 172. TSMC is far cheaper on both of these fronts. Its trailing earnings multiple stands at 33, while the forward earnings multiple is at 23. The interesting thing to note here is that TSMC's earnings are expected to grow at a stronger pace of 27% to $8.93 per share in 2025 compared to Palantir's projected bottom-line growth of 25% to $0.47 per share. So, TSMC is the significantly cheaper AI stock to buy right now compared to Palantir, and buying it looks like a no-brainer, considering the former is expected to see faster bottom-line growth. Moreover, TSMC's dominant position in the foundry market, where it enjoys a solid share of 64% -- way ahead of second-place Samsung foundry's 12% -- means it is well placed to make the most of the secular growth in AI chips. All this makes TSMC a top stock to buy, and investors who missed out on Palantir's phenomenal surge can consider buying the Taiwanese foundry giant before it flies higher following impressive gains in 2024.

A Once-in-a-Decade Investment Opportunity: 1 Artificial Intelligence (AI) Semiconductor Stock to Buy Hand Over Fist and Hold for Years (Hint: It's Not Nvidia) | The Motley Fool

Nvidia has become synonymous with the term "semiconductor," but there's another player looming in the background that could emerge as a more lucrative opportunity in the long run. When it comes to the semiconductor industry, no other company has become as well-known as Nvidia. The company specializes in designing graphics processing units (GPU), a unique piece of hardware architecture that's used for all sorts of generative AI applications. With that said, even the biggest stars have their supporting cast. While Nvidia gets all the glory in the artificial intelligence (AI) landscape, the company has to credit Taiwan Semiconductor Manufacturing (TSM -0.50%) for a lot of its success. Let's look at what makes Taiwan Semi such a unique investment opportunity in the AI realm and explore why the company's long-term picture looks incredibly robust. Taiwan Semiconductor specializes in the fabrication processes that bring GPUs to life. While Nvidia, Advanced Micro Devices, and many more design chips, these companies outsource much of the manufacturing process to TSMC. According to its annual report, Taiwan Semi works with several big-name semiconductor companies and cloud computing hyperscalers including Amazon, Broadcom, Qualcomm, Sony, and of course, AMD and Nvidia. According to Mordor Intelligence, the global total addressable market (TAM) for GPUs is expected to grow at a compound annual growth rate (CAGR) of 33% between 2024 and 2029 -- reaching a size of $274 billion by the end of the decade. Moreover, considering Nvidia's upcoming Blackwell chips and next-generation Rubin GPUs scheduled for 2026, combined with AMD's rival AI accelerators and upcoming launches of chipsets made by Microsoft, Meta Platforms, Amazon, and Alphabet, I think TSMC has an opportunity to acquire incremental market share as demand for GPUs continues to rise. As of market close on Dec. 20, shares of TSMC have gained nearly 90% in 2024 -- absolutely dominating the S&P 500 and Nasdaq Composite indexes. And yet, even with such market-beating gains, there's an argument to be made that shares of Taiwan Semi are undervalued. Right now, TSMC trades at a forward price-to-earnings multiple (P/E) of 22.2. To put this into perspective, this multiple is nearly identical to the forward P/E of the S&P 500 (^GSPC 1.10%). Looked at a different way, investors are essentially valuing the potential of an investment in TSMC, versus that of the broader market, to be the same. I only see two legitimate risk factors surrounding Taiwan Semi. The first and more obvious topic to consider revolves around geopolitical tensions between Taiwan and China. The second and more subtle thing to keep in mind is that TSMC's primary competitor Intel could witness some tailwinds in its own foundry business under the incoming Trump administration, thanks to a campaign promise of investing more in domestic manufacturing. Given the alignment between TSMC's forward P/E and that of the S&P 500, I'm wondering if investors have priced in some of these risk factors with Taiwan Semiconductor stock. Whatever the case, I see an investment in TSMC as far superior to that of the broader capital markets. I think the tailwinds fueling the AI narrative are too much to gloss over, and I'd argue that the semiconductor industry is the core engine powering the AI market, in general. At its current valuation, TSMC seems to be an outright bargain. I encourage investors with a long-term time horizon to consider buying the stock hand over fist and prepare to hold it for years to come.

3 No-Brainer AI Stocks to Buy Right Now | The Motley Fool

Artificial intelligence (AI) stocks have been some of the strongest drivers of the market this year. Given that the AI trend still appears to be in its early innings, though, it looks like a number of them could help drive the market higher next year as well. These three AI stocks, in particular, are all trading at reasonable valuations and look look smart buys right now. Nvidia (NVDA 0.39%) has been the biggest winner of the AI infrastructure build-out, as its graphic processing units (GPUs) are the go-to chips for data centers to use for their computing processing needs to train large language models (LLMs) and run AI inference. As AI models advance, they need more and more computing power. For example, xAI and Meta Platforms both used 10 times as many GPUs to train their latest LLMs than they used for their prior versions. It is this continuing need for exponentially more computing power as well as the wide moat the company created with the help of its CUDA software platform that make Nvidia a buy right now. CUDA was initially created to make it easier for developers to program its GPUs for other uses beyond speeding up graphics rendering in video games, the task for which they were originally designed. This led to CUDA becoming the standard platform upon which developers learned to program GPUs, which has contributed to the moat NVIDIA now enjoys. With AI infrastructure spending only expected to increase in 2025 and beyond, Nvidia still has a big opportunity in front of it. Meanwhile, the stock is attractively valued at a forward price-to-earnings (P/E) ratio of about 31.5 based on analysts' estimates for 2025 and a price/earnings-to-growth (PEG) ratio of approximately 0.98. A stock with a positive PEG ratio below 1 is typically considered undervalued, but growth stocks will often have PEG ratios well above 1. Today, many chip companies use a fabless model, which means they design chips but then outsource the manufacturing to third parties. The reasons for this are simple. Building chip manufacturing facilities (also called fabs or foundries) is capital intensive (it costs a lot of money), and for a foundry to be profitable, it needs to be operated at as near to maximum capacity as possible. Producing chips for multiple clients helps these companies keep their foundries busy. Manufacturing chips also requires a high degree of expertise, and in many cases, the adaption to the latest technologies that continue to drive down chip sizes and increase wafer sizes. With demand for cutting-edge AI chips soaring, it is not surprising that the demand for foundry services has also been skyrocketing -- and one company has been benefiting more than any other: Taiwan Semiconductor Manufacturing (TSM -0.50%), or TSMC for short. Its two largest rivals, Intel and Samsung (each of which has both a third-party foundry business and a chip design arm), have struggled, leaving TSMC to become the dominant contract manufacturer of semiconductors in the world, benefiting from both scale and technological advantages. The top chipmakers in the world are its customers, including Apple, Broadcom, and Nvidia. Its rivals' struggles have also given the company strong pricing power; TSMC is set to raise its prices again next year. This is also leading to higher gross margins for the company. In that context, TSMC looks positioned to remain a solid AI winner. Meanwhile, the stock is attractively valued at a forward P/E ratio of 23 and a PEG of 1.19. Alphabet (GOOGL 0.76%) (GOOG 0.81%) has been perhaps the biggest cloud computing infrastructure beneficiary of the AI trend. Google Cloud's revenue growth accelerated to 35% last quarter as the unit's top line hit $11.4 billion. That growth rate was faster than both Amazon's AWS (19%) and Microsoft's Azure (33%). More importantly, though, this high fixed-cost business has seen a profitability inflection point. As a result, the segment's operating profit has been soaring. Its operating income rose from $266 million a year ago and $1.2 billion in the second quarter to $1.95 billion in the third. The company says its Gemini model has been gaining a lot of momentum and that customers are using its AI platform to build and customize models. Alphabet also credits the custom AI chip that it developed with Broadcom as being a key differentiator, saying that the use of its customized TPUs (tensor processing units) in combination with GPUs was reducing AI inference processing times and lowering costs. In addition, earlier this month, Alphabet was showing off its newest AI innovations with Veo 2, its next-generation video AI generator, and Whisk, its new AI image generator. The side-by-side test results I've seen comparing Veo 2 and ChatGPT's Sora video generator, which launched just weeks earlier, were night and day, with Veo 2 vastly superior in every regard. Other reviews have also praised Veo 2 as being the clear winner. Whisk, meanwhile, has also gotten good reviews. Alphabet also announced its newest AI model, Gemini 2, which it will be incorporating across its product line, including into Google Search. While some investors have worried about the impact that AI might have on Google's search dominance, I continue to see this as a big opportunity. Currently, Google only serves ads on about 20% of its searches, but AI Overviews will give it a chance to monetize those searches it hasn't been serving ads to by attaching new ad formats to these AI answers. Alphabet stock is also attractively valued, trading at a forward P/E ratio of under 22. Given the size of the opportunity in front of it, this looks like a nice level at which to buy the stock.

The Last Time Taiwan Semiconductor Did This, the Stock Doubed in a Year | The Motley Fool

While a company's past performance is no guarantee of its future results, history is one of the few reasonable things we can use to guide our predictions. Particularly for cyclical companies, it can be a pretty good indicator of what's to come. I'm seeing a situation that looks extremely promising for Taiwan Semiconductor Manufacturing (TSM -0.70%) as its setup is similar to the scenario it saw in 2020. The last time Taiwan Semi had a setup similar to its current one, the stock doubled in the year that followed. So could it repeat that performance in 2025? Taiwan Semiconductor is the world's largest third-party chip manufacturer. It contracts out its chipmaking capacities to clients like Nvidia (NASDAQ: NVDA) and Apple (NASDAQ: AAPL), meaning a significant chunk of the world's most powerful devices contain chips originating from TSMC's foundries. Taiwan Semi also has the ability to produce chips using the most advanced process currently available -- the 3nm process node. Node sizes used to refer to the smallest distance in nanometers between specific features on a chip; while they don't anymore, each successive reduction in node size represents a meaningful improvement in the density and processing power of the chips it produces. The 3nm node packs a lot of processing power, but Taiwan Semi is already working on a 2nm process, and expects to start using it to make chips for its clients in late 2025. All of this is reminiscent of how the company looked as it entered 2020. Back then, Taiwan Semiconductor was just launching its 5nm chips, which were an improvement from its previous best 7nm chips. Additionally, a huge wave of chip demand was about to hit TSMC (although it didn't know it) when COVID-19 shut down the world, driving many people to upgrade their computers and other digital devices so that they could more effectively work, and learn remotely, and make use of video chat services to stay in touch with those outside their home. As we enter 2025, there is massive demand for AI chips, and TSMC will roll out 2nm chips later this year. Back in Q3 2023, management forecast that sales of AI chips would grow at a compound annual rate of 50% over the following five years, and predicted that at the end of that period, they would account for a percentage of its revenue in the low teens. However, that growth has so far been even faster than management expected. AI revenue is projected to triple in 2024, and make up a mid-teens percentage of revenue. Management indicated there were no signs of that growth slowing down heading into 2025, so the types of secular trends that prevailed in 2020 should also be apparent in 2025. One might point out that the stock nearly doubled in 2024, but that's partly because the stock was undervalued heading into the year. At the start of 2024, TSMC traded for around 19 times earnings. For comparison, supermarket chain operator Kroger, a low-margin, low-growth business, traded for 18 times earnings. Those greatly different businesses should not have been priced the same. Investors who recognized that and acted on it made good money as the stock's valuation rose throughout the year toward a level where it should have been all along. Now, though, TSMC is trading at a valuation level only a bit above where it did at the beginning of 2020. Although the stock is slightly more expensive now than it was entering 2020, it's in a close enough range that a comparison makes sense. After the initial dip in the market as COVID-19 reached pandemic status, TSMC stock quickly rebounded and proceeded to nearly double that year. It was powered by strong revenue growth that lasted into 2022. However, that period was preceded by weaker sales conditions in 2018 and 2019. Taiwan Semi enjoyed a run of impressive growth from 2020 through mid-2022, and today's situation parallels how that period began. Although the current trend started in mid-2024, the first part of its share price rise was getting the stock back to its usual valuation levels. Now, investors are focused on how it will sustain growth. The massive AI-related demand still on the horizon looks likely to take care of that. Will Taiwan Semiconductor's stock double next year? I'm not sure. However, conditions today appear similar to those under which it achieved that feat in the past. Even if it doesn't double, I think TSMC is a great investment and will likely beat the market in 2025.

Is Taiwan Semiconductor Stock a Buy Now? | The Motley Fool

TSMC's stock has doubled in 2024. Is the chipmaker's stock still a decent buy after that soaring run? Taiwan Semiconductor Manufacturing (TSM -0.50%) is on a roll. On the heels of a three-year slump in chipmaking services, TSMC is facing unprecedented production demand. The artificial intelligence (AI) surge that started two years ago seems to have legs for years, and that's not even the whole story -- modern cars need a ton of processors, and the smartphone market is also coming back from a long downturn. So, TSMC's stock has doubled in 2024. Its market cap has been hovering around the rare $1 trillion level since October. At the same time, TSMC shares are trading at lofty valuation ratios. Is the stock overvalued today, or is TSMC still a great buy at today's high prices? The company works in a hardware manufacturing industry. It's a high-tech business, far removed from building homes, tractors, or industrial machinery, but it's still a relatively low-margin business that requires very large capital investments. Chipbuilding facilities don't grow on trees, you know. TSMC's capital expenses added up to $24.6 billion over the last four quarters. That's more than Apple, Tesla, and Nvidia spent on capital investments -- together. Companies with costly assets tend to grow fairly slowly, and their stocks often trade as very modest valuation ratios. The 10 largest industrial stocks, for example, currently trade at an average price-to-sales ratio (P/S) of 2.5. TSMC's stock is worth 12.8 times sales. It's the same story with price-to-earnings or price-to-free cash flows -- TSMC's stock is soaring at historically high ratios, and it looks expensive next to companies with similar business models. The company backs up its pricey stock valuation with robust business results. After a temporary dip amid the recent shortage of semiconductor materials and engineers, TSMC's sales and profits are soaring again. Revenues rose 39% year over year in the recently reported third quarter. Net income jumped 54% higher in the same period, and cash profits really soared. TSMC's free cash flows nearly tripled, rising 172% to $185 billion Taiwanese dollars (approximately $5.7 billion in U.S. dollars). So you may be paying a premium for TSMC shares, but it's a world-class business and arguably worth every penny of its high stock price. Growth-oriented valuation metrics look quite reasonable with a forward-looking P/E ratio of 23 times next-year estimates and a price-to-earnings-to-growth ratio (PEG) of 1.1. Both figures suggest that the current stock price is just about right -- neither terribly expensive nor particularly cheap. The Taiwanese chipmaking giant is a tempting buy in many ways. TSMC is a good way to invest in the AI boom without picking a winner in the chip-design battles. Remember, nearly all the leading AI accelerator specialists rely on TSMC and others to actually make the physical products. Whoever dominates the hardware market in the long run, TSMC will probably benefit from the entire AI sector's success. But you need to be comfortable with the stock's growth-based valuation first. Otherwise, I'd recommend a lower-priced chipmaker, or perhaps an undervalued provider of AI software and services instead. TSMC may be a fine growth investment, but it's not every Wall Street stroller's cup of refined silicon.