There are always opportunities to position yourself for large gains in the stock market. The trick is knowing where to look.
The best growth stocks are usually those of companies that are bringing innovation to a large and growing market. Betting on the leaders in these markets is usually all you need to do to position yourself for wealth-building returns.
Right now, artificial intelligence (AI) is creating enormous demand for semiconductors (chips) and cybersecurity for enterprises.
Here are two top tech stocks to profit from these opportunities.
Image source: Taiwan Semiconductor Manufacturing.
1. Taiwan Semiconductor Manufacturing
Taiwan Semiconductor Manufacturing (TSM 0.14%) is a leading chip manufacturer. It's vital to the global supply chain for chips used in smartphones and data centers. TSMC is in a strong competitive position of making chips for other companies, making it a great way to profit from the long-term growth opportunity in AI.
Strong demand for cutting-edge process technologies drove a 41% year-over-year increase in revenue last quarter. Chipmaking is a cyclical industry, but the demand for advanced chips used in AI is driving tremendous growth for TSMC that may not slow for at least a few more years.
NYSE: TSM
Key Data Points
TSMC has a solid competitive advantage based on years of investment and expertise in manufacturing cutting-edge processors. Other semiconductor companies rely on TSMC's ability to fulfill large orders. Last year, it supplied more than 11,000 different chips for hundreds of customers.
TSMC's advanced 3-nanometer chips contribute nearly a quarter of its revenue, which positions the company to deliver growth as AI demand heats up. AI use cases will continue to expand in the coming decades, and that is a long-term growth opportunity for the company. High-performance computing products made up 57% of its total revenue last quarter.
While there is always the risk of another downturn in the chip industry, it's important to note that even if you had invested in the stock at the peak of the previous cycle at the end of 2021, you would have already more than doubled your money. This is after a 58% drawdown in the share price in 2022. The long-term growth opportunity is that big.
Analysts expect earnings to grow at an annualized rate of 25%. Assuming the stock continues to trade around the same forward price-to-earnings multiple of 30 on this year's estimate, investors could potentially double their money in the next five years.
Image source: CrowdStrike Holdings.
2. CrowdStrike Holdings
As AI proliferates across the economy, it's also raising the stakes in the cybersecurity market. AI is making cyberattacks more sophisticated and more efficient, which is a growing problem that businesses must address. This is a huge opportunity for the leader in this industry, CrowdStrike (CRWD +0.05%), which has seen its share price rocket 82% over the last year.
The company's revenue has steadily grown at high rates in recent years. Over the last three years, its trailing-12-month revenue has increased from $1.8 billion to more than $4.3 billion. Revenue grew 21% year over year in the most recent quarter.
NASDAQ: CRWD
Key Data Points
Hackers are using AI to more efficiently target vulnerabilities in a company's data systems. CrowdStrike's competitive advantage is based on more than a decade of collecting data. This is making its AI smarter in threat detection. CrowdStrike's Falcon platform is built on trillions of data points to quickly detect threats from AI-driven attacks. It offers security for cloud environments, devices, and user identities.
This advantage is creating momentum for its offering. During the Q2 earnings call in August, management noted that the number of deals worth more than $10 million doubled year over year. The company now has 800 customers with annual recurring revenue exceeding $1 million.
Investors are paying a high multiple of earnings for the stock right now. But this suggests that CrowdStrike could be about to see higher growth as businesses look for solutions to counter an increase in AI-driven attacks. Management guided for at least 40% year-over-year growth in annual recurring revenue in the second half of the year. With AI creating a new level of security issues, betting on this top cybersecurity stock should be a rewarding long-term investment.
