Artificial intelligence (AI) is transforming how people interact with technology in business and personal lives. Although some investors may be growing fatigued by the subject's domination of the stock market conversation, companies are still heavily spending on AI due to unprecedented demand. Furthermore, the market hasn't given these stocks unrealistic multiples, making some of them great buys.
Two that top my list are Taiwan Semiconductor Manufacturing (TSM -2.04%) and Broadcom (AVGO -2.90%). Both are executing at an incredibly high level and have an impressive growth runway.
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Both companies are crucial suppliers to AI hyperscalers
Both companies are members of the $1 trillion club, each hovering around a $1.1 trillion valuation. However, I believe each company could easily surpass the $2 trillion mark in a matter of years with the growth each is experiencing.
Taiwan Semiconductor (or TSMC for short) is a foundry that makes chips for many of the world's top tech companies, including Broadcom and Nvidia. Its clients are unable to manufacture chips themselves, so they farm that work out to a foundry like TSMC.
The company has gained a reputation for offering best-in-class execution and technology, which is why it has become a key partner for many big tech companies. And because TSMC is only a foundry and not attempting to market its own chips, it can remain neutral in the AI race.
Broadcom is a massive tech conglomerate whose products include mainframe software, cybersecurity, and virtual desktops. However, investors are most excited about its AI product line, which includes connectivity switches and XPUs, which are custom AI accelerators. Demand for XPUs increased by double digits in the second quarter of fiscal 2025 (ended May 2) and AI networking achieved 70% growth.
Both companies are staying fairly neutral in the AI race, which allows them to succeed regardless of what client is winning. I consider these to be the top investments in AI, since I can profit from the vast AI build-out without needing to worry about whether or not he technology becomes the wave of the future. Because their clients are spending money with these two right now, they're benefiting substantially.
Furthermore, each company expects strong growth over the next few years, making them compelling buys now.
Each company is set to deliver huge growth
TSMC's management projects that it will achieve a near 20% compound annual growth rate over the next five years, which would lead to about 150% revenue growth over that time frame. Few companies of TSMC's size have achieved that, but investors should have no reason to doubt management with how well connected the business is and how many advanced orders are being placed.
Broadcom is expecting its AI business to generate between $60 billion and $90 billion in revenue by 2027, which is huge considering the total second-quarter AI-related revenue was $4.4 billion (around $18 billion annualized). The company is seeing significant demand from the inference side of AI, which makes sense because the industry is starting to deploy more AI solutions rather than train them.
With this much growth in store for both companies, it should come as no shock that the market may slap a premium valuation on each stock. However, this is only true for Broadcom, as TSMC is still quite cheap compared to its expected growth.
TSM PE Ratio (Forward) data by YCharts.
At 37 times forward earnings, Broadcom stock has a lot of success priced into it. But at its current growth trajectory, this could be a cheap price if the company achieves its $60 billion to $90 billion AI goal.
TSMC is priced in line with the broader market. With the S&P 500 (^GSPC -1.13%) trading at 22.5 times forward earnings, the market is pricing the chipmaker's stock at an average multiple despite projecting market-beating growth.
Due to their AI growth trajectory, both companies look like excellent buys. Although it would have been better to scoop them up while they were on sale a few months ago, the future is still bright for both businesses.
