The AI bull market is here. Stocks are back at all-time highs, thanks largely to a new boom in artificial intelligence (AI).
The launch of ChatGPT has set off a race to be a leader in what top CEOs and major investors think will be the next transformative technology, generative AI. Nvidia, which sells the graphics processing unit (GPU) components that are the backbone of the advanced computing systems required for AI, has been the biggest winner so far. However, there are several other stocks primed to be winners as well. Let's take a closer look at two of them.
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1. Micron Technologies
Micron Technologies (MU 2.92%) is a leader in memory chips. Historically, its business has been highly cyclical, fluctuating from boom times to busts as the semiconductor industry tends to be sensitive to supply gluts and demand shifts. Just a year ago, the company was operating at a wide loss as coming out of the pandemic, the slowdown in demand for PCs and tablets crushed prices for memory chips.
However, Micron is now emerging as a beneficiary of the AI boom as memory chips play a key role in AI servers. As Micron management explained on a recent earnings call, AI server demand is driving growth in high-bandwidth memory, which tightened the supply for the DRAM and NAND chips that Micron specializes in.
Because of that trend, the company expects DRAM and NAND prices to increase through calendar 2024. It now expects record revenue and "much-improved profitability" in fiscal 2025.
CEO Sanjay Mehrotra also said, "We are in the very early innings of a multiyear growth phase driven by AI as this disruptive technology will transform every aspect of business and society." Micron's memory and storage components are valuable in both training and inference functions for AI algorithms, making Micron a likely winner in AI.
If the company can generate record revenue in fiscal 2025, it would top the $30.7 billion in revenue it made in fiscal 2022. At that level, Micron would trade at a price-to-sales ratio of around 4, which is an attractive valuation, compared to other AI stocks.
Micron also has the potential to be highly profitable as its operating margin reached 50% in 2019. If the company's profitability surges, the stock could move a lot higher from here.
2. Taiwan Semiconductor Manufacturing
Another tech stock that seems well-positioned to ride the AI wave is Taiwan Semiconductor Manufacturing (TSM 1.26%). The company, better known as TSMC, is the world's largest contract semiconductor foundry. It handles manufacturing for many of the world's biggest chip designers, including Apple, Nvidia, Broadcom, and Advanced Micro Devices.
TSMC has more than a 50% market share of the third-party chip manufacturing industry, giving it tremendous market power in the semiconductor industry more broadly and in AI chips specifically. It handles approximately 90% of the third-party market of advanced chips, which AI models rely on.
Because of its virtual monopoly in third-party chip manufacturing, TSMC is more resilient than a company like Nvidia, which needs to maintain its competitive edge and pricing power for the stock to keep gaining. Chip manufacturing has high entry barriers, which makes it unlikely that TSMC's leadership will be challenged in the coming years.
Like Micron, TSMC is also emerging from the earlier slump in the semiconductor industry, but its growth is picking up with the help of AI. Through the year's first two months, revenue was up 9.4% and revenue growth accelerated to 11.3%. Investors took this as a sign of AI demand picking up as it was a significant improvement from flat revenue growth in the fourth quarter.
TSMC is also highly profitable, further proving its competitive advantages and pricing power. In the fourth quarter, it recorded an operating margin of 41.6%.
Finally, TSMC is affordably priced, trading at a price-to-earnings ratio of 28, and profits are expected to improve as AI provides a tailwind. The chip manufacturing giant was already a rock-solid business, but its economic moat seems poised to widen in the AI era.
