This has turned out to be a very solid year for artificial intelligence (AI) stocks as companies benefiting from the rapidly growing adoption of this technology have witnessed a solid improvement in their businesses, leading to healthy gains in their share prices as well.
The good part is that AI proliferation is still in its early phases, and the spending on this technology is set to keep growing in 2025. Market research firm IDC estimates that worldwide AI spending could jump to $337 billion next year from this year's projected spending of $235 billion. That would mark an impressive year-over-year increase of almost 50%.
There are several ways investors can capitalize on this big jump in AI spending next year. Let's take a look at two such names that are playing a key role in boosting the adoption of AI and have witnessed a nice acceleration in their growth thanks to this technology.
1. Taiwan Semiconductor Manufacturing
The world's biggest semiconductor foundry, Taiwan Semiconductor Manufacturing (TSM +0.42%), is the go-to manufacturer of chips for multiple chip designers such as Nvidia, Micron Technology, Marvell, Broadcom, Advanced Micro Devices, and Qualcomm, among others, while it also produces chips for consumer electronics companies such as Apple and Sony.
All these customers have been ramping up the demand for chips capable of supporting generative AI applications across multiple verticals. For instance, Nvidia, Micron, Marvell, Broadcom, and AMD are enabling TSMC to capitalize on the rapidly growing demand for AI data center chips. Market research firm Gartner is forecasting a 14% increase in semiconductor revenue next year, driven by strong demand for graphics processing units (GPUs) and memory chips that some of TSMC's customers sell.
NYSE: TSM
Key Data Points
More specifically, AI GPU revenue is expected to increase by 27% next year, while high-bandwidth memory (HBM) demand, a type of memory that is deployed in AI chips, could jump by 70%. Similarly, the adoption of AI in consumer electronics products is going to be another tailwind for TSMC. Apple and Qualcomm, for example, are benefiting from the proliferation of AI-enabled smartphones, while AMD has seen an increase in the demand for central processing units (CPUs) capable of powering AI-enabled personal computers (PCs).
These markets present another secular growth opportunity for TSMC. Shipments of generative AI-capable smartphones could increase by 73% next year, according to IDC, while AI-capable PCs are expected to witness a huge jump of 165% in shipments next year. So, as TSMC's customers get ready to meet the increase in AI chip demand across multiple verticals, the Taiwan-based foundry giant should be able to deliver a solid performance next year.
It is worth noting that TSMC has seen a big jump in the demand for its foundry services this year. The company's revenue in the 11 months of 2024 so far has increased by 32% from the same period last year. TSMC seems set to end the year on a solid footing as its revenue growth in November accelerated to 34% year over year from October's growth of 29%, and this also indicates that the company is set to enter the new year with momentum on its side.
The growth drivers discussed above tell us why the company's revenue is set to grow at a healthy pace of 25% next year.
TSM Revenue Estimates for Current Fiscal Year data by YCharts
TSMC's earnings are also expected to jump by an identical margin in 2025. Throw in the company's attractive valuation, and it is easy to see why buying this semiconductor stock is a no-brainer. TSMC is trading at 22 times forward earnings, a discount to the Nasdaq-100 index's forward earnings multiple of 28 (using the index as a proxy for tech stocks).
The stock has a 12-month median price target of $240, according to 47 analysts covering the stock (96% of whom rate it as a buy), which points toward a 25% jump from current levels. However, it won't be surprising to see TSMC doing better thanks to the critical role it plays in the global semiconductor market, which is why investors should consider buying this stock, as it seems poised for healthy gains in 2025.
2. Dell Technologies
Dell Technologies (DELL +0.58%) has been in the limelight for all the wrong reasons of late as shares of the technology giant crashed following the release of its fiscal 2025 third-quarter results (for the three months ended Nov. 1) on Nov. 26. Investors pressed the panic button as Dell's revenue came in short of Wall Street's expectations.
But that's good news for savvy investors. That's because Dell shares can now be bought at just 21.6 times trailing earnings, while the stock's forward earnings multiple of 12.5 is even more attractive. Buying Dell at this valuation looks like a no-brainer, as it is on track to take advantage of two big AI-related catalysts in 2025 and beyond.
NYSE: DELL
Key Data Points
The first is the booming demand for AI servers. As reported by Bloomberg, the AI server market could clock outstanding growth of 55% in 2025, generating an estimated $252 billion in revenue. Dell is already benefiting from this fast-growing AI niche. This was evident in the company's latest quarterly report, with its revenue from the infrastructure solutions group (ISG) increasing 34% year over year to $11.4 billion.
More specifically, Dell's revenue from sales of servers and networking equipment increased at a faster pace of 58% to $7.4 billion. The company sold $2.9 billion worth of AI servers last quarter and received new orders worth $3.6 billion. Dell exited the quarter with an AI server backlog of $4.5 billion. More importantly, Dell's AI server pipeline for the next five quarters was up by over 50% on a sequential basis.
So, Dell's ISG revenue should keep growing at an impressive pace in 2025, thanks to the massive opportunity in AI servers.
The second AI-related opportunity for Dell is in AI-enabled PCs. We have already seen that this market is set to grow tremendously next year, and that bodes well for Dell since it is the third-largest PC vendor in the world, with a market share of just over 14%. Dell management pointed out on the latest earnings conference call that it is "seeing an indication that customers are lining up their upgrade cycles with new AI PCs in the first half of next year."
These catalysts explain why Dell's earnings growth rate is expected to accelerate from this fiscal year's estimate of almost 10% to $7.82 per share.
DELL EPS Estimates for Current Fiscal Year data by YCharts
The chart above shows that Dell's earnings could jump over 20% in fiscal 2026 (which will begin in February 2025). Assuming Dell does achieve $9.40 per share in earnings in the next fiscal year and trades in line with the Nasdaq-100 index's forward earnings multiple of 28 at that time, its stock price could hit $263. That would be a 125% increase from current levels.
So, investors looking for an attractively valued AI stock can consider using Dell's pullback to buy it as it could deliver big gains in 2025.
