Artificial intelligence (AI) is impacting every sector of the economy, so there are several ways investors can profit from this opportunity. But recent earnings results show that top semiconductor companies are still well positioned to deliver outstanding returns for long-term investors.
The AI chip market is expected to grow at an annualized rate of 24% through 2029 to reach $311 billion, according to MarketsandMarkets. If you have $3,000 you're looking to invest right now, here are two chip stocks to consider buying and holding for the long term.
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1. Advanced Micro Devices
Advanced Micro Devices (AMD -2.16%) has become a widely used brand of chips in the consumer PC market. Its Ryzen processors have taken significant market share from Intel. But it's also one of only two suppliers, along with Nvidia, of general-purpose graphics processing units (GPUs) that are used for AI workloads.
While Nvidia has a commanding lead in GPUs, it's not going to control 100% of the market. This leaves a substantial opportunity for the runner-up in this market to do well. AMD's data center business is booming, with segment revenue up 57% year over year in the first quarter.
AMD is meeting demand for cost-effective alternatives in the chip market. Oracle is experiencing tremendous growth in its cloud infrastructure business right now, and it's a key partner for AMD. Oracle's cloud infrastructure will offer up to 131,072 AMD Instinct MI355X GPUs for AI. AMD has already announced the MI400 series for launch next year, which will enable even better performance for AI training and inferencing.
As data center sales make up a larger mix of AMD's total revenue, it is pushing margins up. Higher margins drove a 55% year-over-year increase in adjusted earnings last quarter. Given the long-term opportunity in the AI chip market, which AMD estimates at $500 billion, investors are undervaluing AMD's future earnings.
The stock is trading at a forward price-to-earnings (P/E) multiple of 38 on 2025 earnings estimates. But this multiple drops to 25 on 2026 estimates. As AMD continues to expand margins from growth in its data center business, the stock could offer significant upside over the next few years and beyond.
2. Broadcom
Beyond the surging demand for general-purpose chips that AMD supplies, there is growing demand for chips designed for specialized tasks. Broadcom (AVGO -1.12%) is one of the best stocks to profit from the demand for custom chip solutions.
Broadcom has been a top-performing semiconductor company for years, supplying components for many markets, including Apple's iPhone. But demand for its application-specific integrated circuits (ASICs) for AI is off the charts.
The company's AI chip revenue grew 46% year over year in the most recent quarter. As demand for custom ASICs grows, it also fuels demand for networking products that can handle faster data transfer, which is needed for next-level AI performance.
Broadcom's new Tomahawk 6 Ethernet switch has enough data capacity to support 100,000 AI chips working together to train the next-generation AI models. The company's networking business posted revenue growth of 170% year over year last quarter, representing 40% of its AI-related revenue.
However, management sees the demand for its custom AI chips outpacing sales of its networking products over time. It's a huge opportunity, as evidenced by Broadcom's momentum. Management expects its AI growth to remain steady through fiscal 2026, which could support new highs for the stock.
Broadcom earns very high margins, so the favorable demand outlook points to robust earnings over the next year. The stock trades at 41 times this year's consensus earnings estimate, but that multiple drops to 33 on next year's estimate. These are not cheap valuation multiples, but the investment in AI technology is pointing to substantial growth in the coming years for leading chipmakers, and that should support excellent returns for investors.
