Nvidia (NVDA 0.33%) has been the star of the artificial intelligence (AI) boom over the last two-and-a-half years. Its GPUs are the cornerstone of every big data center project from the hyperscale cloud customers investing tens of billions of dollars in AI. That's led to massive revenue growth and even stronger earnings growth over the last two years for Nvidia.
Investors have been duly rewarded. Nvidia's stock price climbed 239% in 2023 and another 171% in 2024. That strong price appreciation led the company to briefly top the list of most valuable companies. But now, after the recent stock market sell-off, Nvidia shares currently sit around 25% off their all-time high reached in January.
While many investors may be looking at the AI leader and considering buying shares at the lower price, two other artificial intelligence companies look poised to outperform the semiconductor stock over the long run, helped by competitive advantages that give them great staying power, no matter how the AI story plays out.
Image source: Getty Images.
1. Meta Platforms
Meta Platforms (META 1.91%) may be the biggest long-term beneficiary of advances in generative AI of any company in the world, and it's spending heavily to make that a reality.
Management said its capital expenditures will climb as high as $65 billion this year as it looks to capitalize on the potential of generative AI with a new data center build-out. While that budget isn't as big as the three big cloud computing platforms, Meta doesn't rent its servers to anyone -- it's all for its own business use.
The company wouldn't be spending so much if it didn't see a massive opportunity for its business. It's already seeing positive returns from its advances in AI so far. Meta applied its learnings from developing large language models to its recommendation app, expanding it to more general recommendations across content formats. The result was higher engagement and more time spent on its apps.
Meanwhile, it's seeing strong adoption of its earliest ad creative AI, Advantage+ Creative, with 4 million advertisers using it.
NASDAQ: META
Key Data Points
Expanding generative AI could open the door for more small businesses to buy ads on Meta's apps with little experience or overhead. Meta could eventually offer an AI agent that takes all the hard work out of developing an ad campaign. "Over the long term, advertisers will basically just be able to tell us a business objective and a budget, and we're going to go do the rest for them," CEO Mark Zuckerberg said during Meta's second-quarter earnings call last year. That unlocks a slew of new advertiser for Meta, on top of continuously improving ad efficacy, which translates into higher average ad prices.
Meta is also working on AI chatbots for WhatsApp and Messenger, which could handle customer service and higher-touch sales at scale for businesses. The potential of each business having a fleet of AI agents on WhatsApp could be worth $100 billion, according to at least one analyst. The value it unlocks for businesses is massive and could drive another leg up in revenue for Meta.
The company benefits from very high operating leverage as a software company. Innovations in AI can unlock value for literally billions of people, a scale no other company is working with. So as its AI services gain traction and generate more revenue, it should see strong profit growth.
A lot of the potential value of AI to Meta stock isn't fully reflected in its stock price. Shares trade for about 21.2 times forward earnings, as of this writing. But with growing engagement and an expanding suite of market-leading ad products, Meta should see substantial earnings growth as it builds out its AI capabilities.
2. Taiwan Semiconductor Manufacturing
Nvidia wouldn't be where it is today without the manufacturing capabilities of Taiwan Semiconductor Manufacturing (TSM +1.45%), commonly known as TSMC. The chip manufacturer dominates the industry, accounting for over two-thirds of all spending on semiconductor fabrication. And that share is growing.
There's good reason companies are spending more with TSMC while other fabs tread water: TSMC is the only company capable of manufacturing the world's most advanced chips at scale, and there's very high demand for advanced chips right now.
What's more, its technology lead and scale allow it to manufacture chips at lower costs per chip compared to competition. That creates a virtuous cycle, whereby TSMC wins more big contracts from leading chip designers, which allows it to reinvest in advancing its technology and scaling its manufacturing capabilities. As a result, the gap between TSMC and the competition is growing wider and wider.
NYSE: TSM
Key Data Points
That means TSMC has exceptional staying power. While tariffs pose a short-term threat to demand for semiconductors as prices will have to increase for end users, in the long run, demand will continue to climb. TSMC is positioned to win an outsized portion of that demand, especially as cloud customers require the most advanced chips to make efficient use of space and energy in data centers.
There's no guarantee Nvidia will remain in the position it currently finds itself: supplying the vast majority of AI accelerators to hyperscale customers. In fact, all Nvidia's biggest customers are developing their own custom silicon solutions while looking for alternative's to Nvidia's high-priced chips. But no matter who's designing the chips used in AI data centers, TSMC will be the one printing and packaging them. There's practically no other option.
That means TSMC shouldn't see any margin erosion over time, and management should easily be able to maintain its target gross margin target of 53% or higher. Meanwhile, the stock trades for just 17.4 times forward earnings, which is near its lowest valuation since the start of the AI boom.
