The artificial intelligence (AI) stock boom is showing some signs of cooling off, but that doesn't mean that the opportunity in AI stocks is over by any means.
Big businesses and start-ups are still ramping up spending to capitalize on what many tech CEOs and experts see as the biggest technological revolution since the internet. OpenAI CEO Sam Altman has also said that demand for generative AI is still growing so rapidly that new energy solutions will be needed to support it.
So, there still seems to be plenty of upside potential in AI stocks. If you're looking to capitalize on the opportunity, these two stocks look like great ways to do it.
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1. Taiwan Semiconductor Manufacturing
Most of the AI winners at the moment seem to be hardware stocks like Nvidia which are seeing demand soar for its GPUs and other components that make up the backbone of AI infrastructure. Competition in GPUs and other such hardware components like servers is expected to intensify as Intel and Advanced Micro Devices are launching their own competing AI GPUs.
One company that's benefitting from this increased AI-related competition is Taiwan Semiconductor Manufacturing (TSM 0.14%). Even better, it's less likely to encounter the kind of competitive incursion the hardware stocks referenced above are facing.
TSMC (as it is also known) is the world's biggest contract semiconductor manufacturer, and it dominates the market with an estimated 55% share of third-party chip manufacturing and a 90% share of advanced chip manufacturing. It's the company that has primarily made the era of fabless chip design possible as tech companies and chip designers like Apple, Nvidia, AMD, and Broadcom all turn to TSMC to manufacture their product designs. Even Intel, which has its own foundry business, had TSMC produce its new Gaudi 3 AI chip, as Intel can't match TSMC in advanced chip production. TSMC can now make 3nm (nanometer) chips and is aiming to release 2nm chips in 2025.
That market share and vital position in the chip supply chain give TSMC significant market power. In its fourth-quarter earnings report, the company reported an operating margin of 41.6%, showing that it converts a high percentage of its revenue into profits.
TSMC's growth is also accelerating thanks to the AI boom, as it reported 34.3% year-over-year revenue growth in March and 16.5% in the first quarter, its fastest quarterly pace since 2022, and evidence that its growth is accelerating. Additionally, TSMC trades at a reasonable valuation, giving the stock more potential upside as its growth rate accelerates.
2. Arm Holdings
Another long-term winner in AI and a stock that looks to have a sustainable competitive advantage is Arm Holdings (ARM 1.26%).
Arm is a chip designer, but it has a different business model than most of the companies that compete in the sector. Rather than selling to end users directly, Arm licenses its designs and collects royalties every time a product is sold with one of its designs.
The company works closely with Nvidia and partners investing heavily in AI, including Alphabet, which just unveiled a new Arm-based Axion chip for AI that it will put to use in its cloud computing data centers.
Arm also has an advantage that ties into what OpenAI CEO Sam Altman said above. Running AI applications like ChatGPT takes enormous levels of energy, and Arm's CPUs (central processing units) are known for being more efficient than the competing x86 chips from Intel and AMD. That's a major reason why Arm's processors are found in about 99% of smartphones and why it's becoming a preferred choice in AI hardware. Arm's CPUs are used for Nvidia's Grace Hopper Superchip, and Arm's architecture is included in Nvidia's Blackwell platform.
Arm's business model, in which licensing revenue precedes royalty revenue, also means that its revenue growth is likely to accelerate in the coming quarters as the company noted stronger-than-expected growth in licensing in its most recent quarter, and gave impressive guidance for the fourth quarter.
As long as Arm can maintain its efficiency advantage in CPUs, the company looks like a good bet to be among the AI winners.
