It has been three years since the launch of OpenAI's ChatGPT ushered in the age of generative artificial intelligence (AI). But the burgeoning industry is still very uncertain. It could potentially be as transformational as the internet, a giant bubble that could pop at any moment, or both. Investors must balance the fear of missing out (FOMO) with the very real risk of being left holding the bag if the market changes direction.
Now might be the time to pivot away from pure plays like Nvidia, which earns around 90% of its revenue from its data center segment, and gravitate toward more diversified companies that can benefit from industry growth without being overexposed. Let's explore why Micron Technology (MU 2.23%) and Taiwan Semiconductor Manufacturing (TSM +1.11%) could make compelling picks in December and beyond.
Micron Technologies
With shares up by 180% year to date, Micron Technology is finally getting the market's attention. Investors are realizing that generative AI workloads could dramatically boost demand for its computer memory hardware while boosting margins. The company's reasonable valuation and diversified business model are also long-term tailwinds for the stock.
NASDAQ: MU
Key Data Points
Until this year, AI infrastructure conversation has mainly focused on graphics processing units (GPUs) and cloud computing platforms, which work together to remotely run and train consumer-facing AI large language models (LLMs). However, none of this would be possible without memory -- to store the training data, and to provide the quickly accessible working memory these algorithms need to work in real time while responding to user queries. That's where Micron comes in.
Since its founding in 1978, the company has grown to become a global leader in high-bandwidth memory hardware like DRAM and NAND flash storage. These technologies are essential for generative AI applications, providing plenty of room for growth. Perhaps more importantly, they are also used in a wide range of consumer goods like smartphones, PCs, and cars, which means the company doesn't have all its eggs in one basket.
The next few years are especially exciting for Micron, because generative AI may have driven up demand for memory chips faster than the market can ramp up supply, leading to shortages. Reuters reports that some memory chip makers have begun hiking prices in some of their product lines. Micron could be a clear beneficiary of this trend. With a forward price-to-earnings (P/E) multiple of just 15, shares look unbelievably cheap considering these powerful tailwinds for the company.
Taiwan Semiconductor Manufacturing
While Nvidia is the face of the generative AI chip boom, it is actually a fabless semiconductor company, which means it only designs the chips without actually making them. Most of the heavy lifting is done by Taiwan Semiconductor Manufacturing (TSMC for short), which is arguably the only company capable of delivering the level of quality that Nvidia requires at such a massive scale. Shares have risen by an impressive 46% this year.
An economic moat is a unique characteristic that protects a business from competition and allows it to keep high margins and sustainable profits. As a semiconductor fab, TSMC's edge comes from the sheer technological complexity of this industry and the significant capital (including human capital) it has invested into perfecting its manufacturing processes.
Image source: Getty Images.
While generative AI is driving the majority of TSMC's near-term growth, it is just one of the company's many businesses. Chips are used in practically every electronic product. And while TSMC doesn't disclose its customer breakdown, analysts estimate that the Nvidia account was worth just 11% of its revenue in 2023. That number has likely risen to the low 20s by now, but it's far from overexposure. TSMC has other major clients of similar sizes (like Apple) that serve totally different industries.
NYSE: TSM
Key Data Points
With a forward P/E multiple of 24, Taiwan Semiconductor is also reasonably priced compared to the S&P 500 average of 22. While the company enjoys a slight premium, investors can rest easily knowing that there aren't wild expectations built into its current valuation.
