Technology stocks witnessed a significant pullback of late, as evidenced by the 13% decline in the Nasdaq-100 Technology Sector index in the past month. Investor sentiment soured due to the trade war sparked by the tariffs announced by the Trump administration on Canada, Mexico, and China, which led those nations to announce retaliatory tariffs on U.S. goods.
The negative investor sentiment isn't surprising, as tariffs could increase the manufacturing costs for tech companies that rely on foreign markets to produce and assemble their goods. Artificial intelligence (AI) stocks, in particular, experienced steep sell-offs as investors rush to book profits in a risk-off environment.
Shares of Palantir Technologies (PLTR +2.45%), for instance, are down 25% in the past month. Semiconductor bellwether Taiwan Semiconductor Manufacturing (TSM +1.97%), popularly known as TSMC, lost 15% of its value over the same period. However, the recent pullback in these AI stocks looks like a buying opportunity for savvy investors, especially considering the strong results they deliver and the huge end-market opportunities they can benefit from.
Let's look at the reasons why Palantir and TSMC could turn out to be solid long-term investments for investors looking to add AI stocks to their portfolios amid the ongoing sell-off in the technology sector.
1. Palantir Technologies
Palantir Technologies continues to trade at an expensive valuation despite the sharp drop in its stock price in the past month. However, the company is scratching the surface of a massive opportunity in the generative AI software space that could set it up for decades of healthy growth.
McKinsey estimates that the AI software and services market could grow from $85 billion in 2022 to $1.5 trillion in 2040. The higher end of the management consulting firm's AI software and services revenue stands at a whopping $4.6 trillion in 2040. Palantir has already started benefiting from this huge addressable opportunity.
NASDAQ: PLTR
Key Data Points
Its customer base is growing rapidly, and the revenue pipeline is getting better with each passing quarter, leading to an acceleration in the company's revenue and earnings growth. For instance, Palantir's revenue in the fourth quarter of 2024 increased 36% year over year to $828 million. The company's earnings increased at a much faster pace of 75% thanks to higher spending by customers on its Artificial Intelligence Platform (AIP).
Palantir's AIP helps both commercial and government customers embed generative AI tools into their operations, enabling them to improve productivity and efficiency. This explains why Palantir's customers tend to expand their usage of AIP after signing the initial deal. Even better, Palantir's customer count is swelling at an incredible pace, thanks to AIP. This was evident from management's comments on the February earnings conference call, with Palantir Chief Revenue Officer Ryan Taylor pointing out, "AIP continues to fuel new customer acquisition as we have nearly five times the number of U.S. commercial customers as we did three years ago and significant expansion opportunities at existing customers."
So, it wasn't surprising to see Palantir closing $1.8 billion worth of contracts in the previous quarter, which was a terrific increase of 56% from the prior year. The company's contract book increased at a faster pace than its revenue, indicating that its growth could continue to pick up going forward. The remarkable growth in Palantir's contract value led to a 40% year-over-year jump in its remaining deal value to $5.43 billion. The metric refers to the total remaining value of contracts at the end of a quarter.
All these metrics make it clear that Palantir is cornering a bigger chunk of the generative AI software market. Of course, the company may feel the impact of tariffs in the near term if its customers decide to tighten their purse strings on account of the trade war. However, the productivity gains delivered by integrating generative AI software solutions could eventually lead them to open their wallets in the future.
That's why it would be a smart move to start accumulating Palantir stock while it is on its way down, as the immense potential of the generative AI software market could send the stock soaring over the long run.
2. Taiwan Semiconductor Manufacturing
TSMC is a key player in the global semiconductor industry. The Taiwan-based company fabricates chips for consumer electronics companies and major fabless chipmakers, and it is the biggest semiconductor foundry in the world, with a market share of 64%.
This puts TSMC in a terrific position to capitalize on the secular growth of the semiconductor market in the long run. Deloitte estimates that the global semiconductor industry could more than triple in size over the next 15 years, generating $2 trillion in annual revenue in 2040. AI chips are going to play a central role in this market's massive growth in the long run, with their sales expected to increase at an annual rate of 35% over the next decade.
TSMC fabricates chips for almost all the leading AI chip companies, ranging from Nvidia to Broadcom to Advanced Micro Devices to Marvell Technology. As a result, it is an indirect beneficiary of the hundreds of billions of dollars that are being poured by tech giants such as Microsoft, Amazon, Meta Platforms, and Alphabet to shore up their AI infrastructure. TSMC also manufactures chips for Apple and Qualcomm, which puts it on track to benefit from the AI-driven growth in the personal computer (PC) and smartphone markets.
NYSE: TSM
Key Data Points
A big reason why TSMC is well ahead of its rivals in the foundry market is because the chips manufactured using its advanced process nodes enjoy a technological advantage. TSMC's customers are placing orders in bulk for its advanced chips, which is why the Taiwan-based company's factories that produce 3-nanometer (nm) and 5-nm chips are reportedly running at full capacity.
The demand for these advanced chips is so strong that TSMC is on track to raise its capital expenditure by around 33% in 2025. The company plans to spend 70% of its 2025 capex on building advanced chip production facilities so that it can meet the strong demand from its AI customers. That's the right thing to do, as chips manufactured using advanced process nodes pack more computing power and consume less energy.
This is the reason why chipmakers such as Marvell are already moving to the 2nm process node for manufacturing AI chips. Not surprisingly, analysts are forecasting TSMC's revenue from 2nm chips to grow by fourfold between 2025 and 2026. In all, TSMC is pulling the right strings to ensure that it remains the top semiconductor foundry in the world, and that should set the company up for years of outstanding growth.
Management pointed out on the company's January earnings conference call that it expects its five-year revenue to increase at a compound annual growth rate of 20%. It could sustain such growth for a much longer time, considering the secular growth opportunity in the semiconductor industry.
And finally, the recent pullback in TSMC stock has brought its price-to-earnings ratio to just 25, a discount to the Nasdaq-100 index's earnings multiple of 30 (using the index as a proxy for tech stocks). Buying TSMC stock at this valuation looks like a no-brainer as the lucrative opportunity in semiconductors thanks to catalysts such as AI should ideally pave the way for decades of impressive growth at this company.
