As the artificial intelligence (AI) stock market shows signs of a slight cool-down, the potential in AI stocks remains abundant and ripe for the picking.
Both large corporations and nimble startups continue to increase their investments, eager to seize the golden opportunity presented by what many industry leaders and tech experts hail as the most significant technological revolution since the inception of the internet. OpenAI CEO Sam Altman has even voiced that the demand for generative AI is growing at such a furious pace that fresh energy solutions will be required to sustain it.
Despite the current landscape, there is still a myriad of untapped potential in AI stocks. For those seeking to capitalize on this opportunity, two standout stocks emerge as promising vehicles to ride this technological wave.
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Embracing Innovation: Taiwan Semiconductor Manufacturing
The current champions of AI mainly revolve around hardware stocks like Nvidia, witnessing an unprecedented surge in demand for GPUs and other essential components that underpin the AI infrastructure. Notably, the competition in GPUs and related hardware elements such as servers is poised to intensify with the imminent launch of competing AI GPUs by tech giants like Intel and Advanced Micro Devices.
One standout entity capitalizing on this escalating competition in the AI space is Taiwan Semiconductor Manufacturing (NYSE: TSM). What sets TSMC apart is its ability to navigate the competitive landscape, significantly reducing the chances of encroachment faced by other hardware stocks in the domain.
TSMC, also known as TSMC, reigns as the largest contract semiconductor manufacturer across the globe, boasting an estimated 55% share in third-party chip manufacturing and a dominating 90% share in advanced chip production. It stands as the primary enabler of the fabless chip design era, serving as the go-to manufacturing partner for tech behemoths and chip designers such as Apple, Nvidia, AMD, and Broadcom. Even Intel, with its foundry business, entrusted TSMC to produce its new Gaudi 3 AI chip, acknowledging TSMC’s superiority in advanced chip manufacturing. TSMC currently crafts 3nm chips and eyes the production of 2nm chips by 2025.
TSMC’s commanding market share and pivotal position in the chip supply chain endow it with substantial market influence. In its latest earnings report, the company posted an operating margin of 41.6%, showcasing its ability to convert a significant portion of its revenue into profits.
Furthermore, TSMC’s growth trajectory is skyrocketing due to the AI upsurge, evidenced by its 34.3% year-over-year revenue surge in March and a 16.5% increase in the first quarter, marking its swiftest quarterly growth pace since 2022. Additionally, TSMC boasts a reasonable valuation, paving the way for potential upside as its growth momentum escalates.
Riding the Wave: Arm Holdings
Another enduring victor in the realm of AI, holding a sustainable competitive edge, is Arm Holdings (NASDAQ: ARM).
While Arm operates as a chip designer, its business model diverges from most sector competitors. Instead of selling directly to end users, Arm licenses its designs and garners royalties for each product incorporating its designs that gets sold.
The company collaborates closely with Nvidia and partners with significant investments in AI, such as Alphabet, which recently introduced a new Arm-based Axion chip tailored for AI applications in its cloud computing data centers.
Arm enjoys a competitive advantage consistent with what OpenAI CEO Sam Altman alluded to earlier. The operation of AI applications like ChatGPT demands substantial energy consumption, making Arm’s CPUs (central processing units) stand out for their efficiency compared to Intel and AMD’s x86 chips. This efficiency factor has propelled Arm processors to feature in about 99% of smartphones and emerge as a sought-after choice in AI hardware. Nvidia’s Grace Hopper Superchip harnesses Arm’s CPUs, and Arm’s architecture forms part of Nvidia’s Blackwell platform.
Moreover, Arm’s revenue model, where licensing revenue precedes royalty income, positions the company favorably for accelerated revenue growth in the forthcoming quarters. Notably, Arm reported robust growth in licensing in its recent quarter, coupled with an impressive outlook for the fourth quarter.
As long as Arm maintains its efficiency edge in CPUs, the company appears primed to join the ranks of AI victors.
Concluding Thoughts
As the world hurtles forward on the AI trajectory, investors stand at a crucial crossroads, presented with an array of lucrative opportunities in the AI stock market domain. Firms like Taiwan Semiconductor Manufacturing and Arm Holdings serve as prime examples of entities positioned to ride the AI wave and secure their spots at the pinnacle of this burgeoning sector.
For savvy investors seeking to partake in this technological revolution, these two stocks stand out as promising avenues for long-term growth and financial prosperity.
