Demand for artificial intelligence (AI) is driving significant gains for leading chip stocks. These companies are playing pivotal roles in the adoption of this technology, and there are still opportunities for investors to make money. Statista estimates the AI chip market will grow more than 30% in 2024, which is significantly outpacing the 16% growth for the broader semiconductor industry.
Here are two of the best stocks to profit off this opportunity.
1. Nvidia
Nvidia (NVDA +2.59%) shares are up 186% year to date, at the time of writing, but despite this stellar run, investors shouldn't feel like they have missed the boat. The company's latest earnings report shows demand trends holding strong for this leader in graphics processing units (GPUs), and these are expected to carry over to 2025.
NASDAQ: NVDA
Key Data Points
"The age of AI is in full steam, propelling a global shift to Nvidia computing," CEO Jensen Huang said. For fiscal Q3, the company exceeded its own guidance, with revenue surging 94% year over year to reach $35 billion.
While investors wait for Blackwell, which is the company's new AI computing platform currently in production, it's encouraging that Nvidia's Hopper chips are still in high demand. Nvidia reported that H200 chip sales grew significantly in the quarter, making it the fastest product ramp in the company's history.
Blackwell will be a major catalyst for growth next year. CFO Colette Kress said, "Blackwell demand is staggering, and we are racing to scale supply to meet the incredible demand customers are placing on us." This isn't a chip, but a customizable computing platform that includes different types of chips to deliver the computing power needed for generative AI workloads -- one of the major trends in high-performance computing right now. Based on benchmark tests, Blackwell can deliver 2.2 times the performance over Hopper-based chips.
Some investors might look at the stock's $3.5 trillion market cap and assume it is expensive, but comparing the share price to Wall Street's earnings estimates, the company's value seems reasonable. Over the next several years, the consensus analyst estimate has the company's earnings growing at an annualized rate of 37%. With the stock trading at 34 times next year's earnings estimate, the stock can still deliver market-beating returns for investors.
2. Taiwan Semiconductor Manufacturing
Shares of Taiwan Semiconductor Manufacturing (TSM +1.40%) are up 91% over the last year. It makes chips for Nvidia and other chip companies, so it is benefiting from the same demand trends in high-performance computing.
NYSE: TSM
Key Data Points
Revenue grew 36% year over year in Q3, and the company's high margins are fueling even more growth on the bottom line, with earnings up 54%. TSMC attributed its strong quarter to AI-related demand, which may be stronger than investors expected. Management said the revenue contribution from AI server chips is on track to triple for the full year.
"As the strong structural AI-related demand continues, we continue to invest to support our customers' growth," CFO Wendell Huang said on the Q3 earnings call. The company must invest today for demand that will come later on, so it's a good sign that it expects capital expenditures to increase to over $30 billion for the full year.
The company plays a crucial role in the global supply of chips. It controlled 62% of the global foundry market in Q2 2024, according to Counterpoint Research, and its market share has slightly increased over the last two years. With investment in AI servers expected to grow significantly over the next decade, TSMC has a bright future.
The shares trade at a forward price-to-earnings ratio of 27 on 2024 estimates and just 21.5 on next year's consensus. With analysts expecting annualized earnings growth of 31%, TSMC stock is still a solid buy.
