Artificial intelligence (AI) is already a huge growth driver for many tech companies and will likely be a catalyst for years to come. IDC research estimates that AI spending will contribute nearly $20 trillion to the global economy by 2030.
But which companies are poised to benefit over the next decade as AI takes off? Here's why Nvidia (NASDAQ: NVDA) and Taiwan Semiconductor Manufacturing (NYSE: TSM) should be on your short list of AI stocks.
Image source: Getty Images.
1. Nvidia
While many companies are currently benefiting from artificial intelligence, Nvidia has the potential to continue tapping into this massive trend for many years. Nvidia's GPUs have long been a top choice among tech companies needing the best chips for their data centers, with the company having an estimated 70% to 95% of the AI processor market.
That lead gives Nvidia a healthy head start in the AI chip race, and the company continues to release new semiconductors to ensure it won't get caught flat-footed. The latest iteration is the company's Blackwell GPU for AI, which Nvidia CEO Jensen Huang said on the third-quarter earnings call was already in the hands of top customers and is 2.2x faster than its Hopper GPUs.
Huang is preparing his company for an unprecedented wave of AI data center spending, which he estimates will reach $2 trillion over the next five years.
The good news for investors is that it won't take years for Nvidia to benefit from AI. In the company's third quarter (ending Oct. 27), revenue increased 94% to $35.1 billion, and non-GAAP (generally accepted accounting principles) earnings soared 118% to $0.81 per share. Much of the company's growth is already being spurred by Nvidia's data center segment, which had a 112% sales increase to $30.8 billion in the quarter.
The one thing to note with Nvidia's stock is that it isn't cheap. The company's shares have a price-to-earnings ratio of 54.5 right now, higher than the S&P 500's (SNPINDEX: ^GSPC) 30.6. But with AI spending ramping up and Nvidia leading the pack with its GPUs, there's likely more room for this tech giant to run.
2. Taiwan Semiconductor
Taiwan Semiconductor is a unique AI investing angle because the company doesn't create any cutting-edge software or high-powered processes. Instead, it manufactures the semiconductors that go into the world's most advanced data centers.
The company manufactures about 90% of the world's most advanced processors, and business is booming. In the third quarter (ending Sept. 30), the company reported sales of $23.5 billion, up 36% from the year-ago quarter, and an earnings increase of 54% to $1.94 per American depository receipt (ADR).
Just as with Nvidia, huge demand for AI chips over the coming years will likely continue to fuel Taiwan Semiconductor's growth. On the latest earnings call, CEO C.C. Wei said, "Almost every AI innovator are working with us," and added that his company "... probably gets the deepest and widest growth of anyone in this industry." In short, as the $2 trillion in data center spending ramps up, Taiwan Semiconductor will be the main supplier of all the processors.
Though Taiwan Semiconductor's stock is up about 97% over the past year (as of this writing), it's not outrageously expensive, at a P/E ratio of just 29.5. That makes now a good time to pick up shares of the chip manufacturer as AI semiconductor demand ramps up.
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Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
