Artificial intelligence (AI) investing is still a major theme in the market. Although some AI hyperscalers have had success rolling out AI models, they aren't making a ton of money from it yet. As a result, I think investors are better off buying shares of the companies benefiting from this spending.
This makes shares of companies like Nvidia (NVDA +3.55%) and Taiwan Semiconductor (TSM +3.21%) excellent investments right now, and I think they are top AI stocks to buy with a little bit of June remaining.
Image source: Getty Images.
1. Nvidia
There's an old saying: History doesn't repeat itself, but it often rhymes. Applying this wisdom to the AI arms race makes it easy to see a parallel: the gold rush.
During the gold rush, only a few prospectors struck gold and got rich, while many of them lost everything. On the flip side, those who sold pickaxes and shovels to the prospectors made a ton of money. That gives rise to the investment description of "picks and shovels," which perfectly describes Nvidia and Taiwan Semiconductor.
NASDAQ: NVDA
Key Data Points
Nvidia makes graphics processing units (GPUs) that excel at processing workloads requiring immense computing power. A GPU is different from a traditional CPU because it can process multiple calculations in parallel. Combining this attribute with the ability to connect thousands of GPUs together in clusters allows AI hyperscalers to create jaw-dropping computing capacity used to train and run AI models.
Nvidia has an iron grip on the data center market, with most estimates stating that Nvidia has a 90% or greater market share in the data center GPU space. This dominance has allowed Nvidia's stock to prosper, as its revenue has dramatically risen since the start of 2023.
NVDA Revenue (TTM) data by YCharts
Nvidia is far from done growing. It posted 69% revenue growth in Q1 and projects 50% in Q2.
With Nvidia's clients announcing record data center spending for this year, it's no surprise that there's a ton of upside left. As a result, I think it's still one of the best AI stocks to own moving forward.
2. Taiwan Semiconductor
Nvidia doesn't make the chips that go into its GPUs; that's done by Taiwan Semiconductor. Alongside Nvidia, Taiwan Semi also has several other notable names in the AI arms race as clients, as well as consumer electronics customers like Apple. If you've got a device that would be considered advanced technology, chances are there's a chip produced by Taiwan Semiconductor inside of it.
NYSE: TSM
Key Data Points
Taiwan Semi is also expanding from its home base in Taiwan to the U.S., Japan, and Germany, reducing the single point of failure risk by having all manufacturing based in Taiwan. Taiwan is always at risk of war with mainland China, which could disrupt the global economy should action occur. However, a takeover would likely trigger the rest of the stock market to sell off heavily. As a result, I think investors overstate the risk of investing in a Taiwan-based company.
There's a ton to like about TSMC as an investment, but its growth is near the top. Management projects that Taiwan Semi's AI-related revenue will increase at a 45% compounded annual growth rate (CAGR) over the next five years, with total revenue increasing at nearly a 20% CAGR. That's market-crushing growth, but the stock trades at nearly the same multiple as the broader market, as measured by the S&P 500 (^GSPC +1.05%).
TSM PE Ratio (Forward) data by YCharts
At 22.8 times forward earnings, its valuation is almost the same as the S&P 500's 22.9 times forward earnings. This reasonable valuation, combined with above-average growth, makes Taiwan Semiconductor a no-brainer buy today. Investors can confidently take a position here and expect solid returns over the next five years.
