The artificial intelligence (AI) investing trend has been going on since the start of 2023, but investors don't need to fear missing out. Many fantastic companies look like solid buys right now, and even though these companies have risen substantially, there is still plenty of room for more growth.
Three companies that I think look like solid buys now are Nvidia (NVDA 2.92%), Taiwan Semiconductor Manufacturing (TSM 1.54%), and ASML (ASML 0.21%). This trio has one thing in common, and I believe it's the factor that makes them better stock picks than other AI investment options.
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All three companies are critical in the AI value chain
All three companies are vital in the AI arms race, but aren't necessarily directly competing in it. Nvidia, Taiwan Semiconductor, and ASML are critical parts of the chip value chain, the key tools in training and running AI models.
ASML machines are required to lay the microscopic traces on a chip. Nobody else has ASML's technology, effectively giving it a monopoly on the process. As a result, if a company wants to make cutting-edge chips, it must work with ASML. So, when investors hear about a chip factory being built (such as Taiwan Semiconductor's $100 billion investment in U.S. chip production), know that some of that money is flowing into ASML.
Taiwan Semiconductor is a chip foundry that acts as a fabrication facility for companies that can't produce chips themselves. That's practically every big tech company, as a business like Nvidia is only focused on designing chips and assembling them into a finished GPU. TSMC has always prided itself on offering the most advanced technology, and big-name clients like Nvidia and Apple have consistently stayed customers due to its top-notch execution.
Nvidia is the last company in this value chain, as it assembles chips produced by TSMC that were made on machines from ASML. Nvidia's graphics processing units (GPUs) and the software that supports them are best in class. They have contributed to Nvidia holding a 90% or greater market share in the data center GPU market. GPU demand continues to grow as various AI hyperscalers announce record-breaking capital expenditures, mostly devoted to building data centers and filling them with top-notch GPUs from Nvidia.
The biggest factor with investing in a trio like this is that you don't necessarily need to pick a winner in the AI arms race. Regardless of who wins, Nvidia GPUs, TSMC chips, and ASML machines are likely being used to create the hardware that competing AI models run on. An investment in this trio is a bet that we will need more advanced and increased computing capacity, which feels like a safe gamble.
Although these stocks have already performed well, there's still plenty of room for them to rise.
The future is bright for all three stocks
Since the start of the AI arms race in 2023, this trio has proven to be a winning investment.
ASML hasn't performed as well because it was hit with some export restrictions that hurt its China business (and thus its stock price), but I believe it's positioned well to rebound. ASML's stock hasn't been this cheap since 2023, which bodes well for future returns.
ASML PE Ratio data by YCharts
Even though Taiwan Semiconductor has been a stellar performer, its stock is also quite cheap, trading for 21.2 times forward earnings.
TSM PE Ratio data by YCharts
That price tag is significant, as it is less than the S&P 500 (^GSPC 0.58%), which trades at 22.1 times forward earnings. With a company as well connected in an important industry like AI as TSMC, this discount is surprising, and investors should take advantage of it by scooping up shares today.
Last is Nvidia, which is the most expensive of the three.
NVDA PE Ratio (Forward) data by YCharts
However, Nvidia is also growing the fastest of the three, with revenue rising 69% in its most recent quarter compared to TSMC's 31% and ASML's 42%. With growth like that, I'm happy to pay a bit of a premium to own Nvidia stock.
I think this trio has a phenomenal chance of stomping the market, as they are all growing at an incredible pace and have a massive and growing market to serve. By choosing the AI arms dealers in the AI arms race, investors can be assured that they're investing in a near-guaranteed winner, which is why I'm bullish on this trio.
