Artificial intelligence (AI) promises to deliver trillions of dollars in efficiency gains to the economy. It could take a few decades to realize AI's full potential, but this also means long-term growth for leading companies that provide the chips and cloud services necessary to harness the full power of AI.
If you have a few thousand dollars you don't need for living expenses, the compounding returns from the following stocks could multiply those savings over the next 10 years and beyond.
Image source: Getty Images.
1. Taiwan Semiconductor Manufacturing
Shares of Taiwan Semiconductor Manufacturing (TSM 3.58%) have increased by 258% over the past three years, significantly outperforming the S&P 500's 70% return. With top tech companies relying on TSMC to make their chips, it is well-positioned to capitalize on the growing demand for more data centers and other high-performance computing applications.
TSMC has extensive capabilities in making the smallest and most powerful chips. It has unmatched manufacturing capacity. Over the past year, the company has invested nearly $42 billion in capital expenditures, including projects to expand its manufacturing base in the U.S., Europe, and Japan.
NYSE: TSM
Key Data Points
Revenue is exploding, with high-performance computing chips accounting for 57% of its quarterly revenue. The company reported a year-over-year revenue increase of 41% in the third quarter, and analysts expect TSMC to maintain a compound annual growth rate of 17% through 2030.
Management had previously guided for a mid-40% annualized growth rate in AI chips through 2029, but demand has been trending slightly above that outlook so far. Investors may be undervaluing the long-term opportunity for leading suppliers of AI infrastructure, such as TSMC.
Despite the stock's impressive run, it remains trading at an attractive valuation that should yield further market-beating returns. Assuming the stock is still trading at a forward (one-year) price-to-earnings multiple of 22, the shares could climb to over $500 by 2030. This is based on the consensus long-term earnings growth estimate of 25%.
Image source: Getty Images.
2. Alphabet (Google)
Shares of Alphabet (GOOG +3.57%) (GOOGL +3.60%) have soared 53% this year. Google Search, its largest revenue generator, has proven more resilient to competition from AI model makers like OpenAI than investors initially perceived at the start of the year.
Alphabet has all the assets it needs to capitalize on the AI boom. It has data centers, proprietary AI chips (Tensor Processing Units), cloud computing, and billions of users who rely on its various services every day, including YouTube, Gmail, and Maps. Quarterly revenue just hit $100 billion for the first time in company history, with strong growth reported across the business.
The robust growth in Google Cloud remains the most attractive opportunity in Alphabet's business. The enterprise cloud business reported another quarter of strong growth driven by growing demand for AI services. The cloud segment's backlog now stands at $155 billion, representing a 46% quarter-over-quarter increase. This indicates long-term commitments from major companies that are expected to support high growth for several years to come.
NASDAQ: GOOGL
Key Data Points
As demand for cloud services grows, Google Cloud will contribute a growing percentage of Alphabet's total profit. The cloud segment reported an 85% year-over-year increase in operating income last quarter, reaching $3.6 billion. This is while the company's total operating profit grew 10% year over year to $31 billion. Google Cloud's growth is a significant growth catalyst, given its competitive advantage in offering power-efficient compute for AI workloads.
With Alphabet diversifying its revenue beyond online advertising, driven by strong recent growth in subscription and cloud services, the stock is attractive at its current valuation. Despite the stock's rally in recent months, it still trades at a reasonable forward earnings multiple of 26 based on 2026 estimates. Analysts are projecting its earnings to grow around 15% annually in the coming years, which should enable investors to outperform the broader market.
