Artificial intelligence (AI) continues to be one of the biggest driving forces in the stock market. While chipmakers and cloud computing companies have been the biggest early beneficiaries, software companies are starting to see nice growth opportunities emerge as well.
That said, the semiconductor sector is still one of the best places to find attractively valued stocks tied to AI. Let's look at two semiconductor stocks that should see AI help power their growth in December and beyond.
NASDAQ: NVDA
Key Data Points
1. Nvidia
The biggest AI winner thus far has been Nvidia (NVDA 1.41%), which has grown to become the second-largest company in the world. Nvidia originally developed a new type of semiconductor chip called a graphics processing unit (GPU) to help speed up the rendering of graphics in video games and elsewhere. For a long time, this was a niche industry dominated by Nvidia and ATI (which has since been acquired by Advanced Micro Devices).
Nvidia was able to expand the use of GPUs to other industries with the help of its CUDA software platform, which allowed the chips to be programmed to more efficiently handle tasks. This led to more developers learning to program GPUs using CUDA, which led to the developers purchasing Nvidia GPUs to do their work on, creating a virtuous circle and helping create the wide moat the company sees today.
The use of GPUs in cryptocurrency mining became a growth driver for the company back in 2016-2017, but it was the use of GPUs for training large language models (LLMs) and AI inference in beginning in 2021-2022 that led to astronomical growth for Nvidia. Today, Nvidia's GPUs have become the backbone of the AI infrastructure buildout, and through the wide moat it gained with CUDA, it now holds an approximate 90% market share.
Image source: Getty Images.
Nvidia's CEO says the current demand for its chips is "insane," as the world's top tech companies race to become AI leaders. The biggest risk to the stock is if demand slows. However, Nvidia's largest customers have by and large expressed plans to continue ramping up AI infrastructure spending to take advantage of what many view as a once-in-a-generation opportunity. Also working in Nvidia's favor is that in order to improve their AI models, these companies need exponentially more computing power, and thus more GPUs, to train their models on.
Despite its huge gains in the past few years, the stock trades at an attractive valuation. It has a forward price-to-earnings (P/E) ratio of about 33 based on 2025 analyst estimates, and a price/earnings-to-growth (PEG) ratio of approximately 1. A PEG ratio under 1 is usually considered undervalued, but growth stocks will often command PEG ratios well above 1.
NVDA PE Ratio (Forward 1y) data by YCharts.
All this makes Nvidia an attractive option to consider buying this month as we head into 2025.
2. Taiwan Semiconductor Manufacturing
While Nvidia has become the dominant player in the GPU market, Taiwan Semiconductor Manufacturing (TSM 1.25%), or TSMC for short, has become the leading player in the contract semiconductor manufacturing space. The company is a close partner with Nvidia and the primary manufacturer of its GPUs. Apple, meanwhile, is its largest customer, and the iPhone maker regularly buys out all of the capacity of TSMC's advanced nodes when TSMC moves to newer advanced chip manufacturing technology.
NYSE: TSM
Key Data Points
TSMC thus has two big AI growth opportunities in front of it. The biggest remains making chips to meet the huge demand for AI chips coming from the AI infrastructure buildout. TSMC will continue to benefit from Nvidia's success, but it will also benefit from any companies looking to get in on this space as well. A number of companies have started to design custom AI chips through Broadcom and Marvell to meet specific needs, while Arm Holdings and Softbank have been rumored to be looking for manufacturing capacity to make their own AI chips.
In addition to AI chips for data centers, TSMC would also benefit from any increased demand coming from an end device hardware upgrade cycle. Newer smartphones and PCs are generally needed to run the latest AI offerings, so any increased demand for smartphones or computers would benefit the company. Apple is pushing its new AI features with Apple Intelligence, which is expected to boost iPhone 16 sales, while Microsoft has been advancing its AI Copilot, which could help with an enterprise PC upgrade cycle.
To meet growing demand, TSMC continues to invest in adding more capacity while also continuing to push technology innovation and shrinking node sizes. Smaller nodes allow for better chip performance and power consumption, while also increasing the number of chips that can fit on a wafer.
TSMC has also displayed strong pricing power over the past few years, and it is set to raise prices once again in 2025. According to Morgan Stanley, the company will increase prices by 10% for CoWoS (chip on wafer on substrate), 6% for high-performance computing, and 3% for smartphones. Notably, CoWoS is a packaging technology used for high-performance chips, such as Nvidia's GPUs.
Like Nvidia, TSMC trades at an attractive valuation, with a forward P/E under 23 based on analysts' 2025 estimates and a PEG of 1.2.
TSM PE Ratio (Forward 1y) data by YCharts.
Given the opportunity still in front of TSMC, it looks like a solid stock to buy in December ahead of what should be a strong 2025 for the company.
