Artificial intelligence (AI) promises to significantly increase labor productivity and business efficiency. The operating efficiencies from AI across the global economy are projected to reach $40 trillion, according to Morgan Stanley. It's still early to position yourself to profit from this incredible opportunity.
However, for AI to reach the potential Morgan Stanley forecasts, it will require more data centers and powerful chips. Here are two companies positioned to benefit from AI infrastructure spending over the next several years.
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Nvidia
Nvidia's (NVDA 4.42%) graphics processing units (GPUs) remain the go-to choice for data centers needing the most powerful chips across different AI workloads. Nvidia's data center revenue surged 66% year over year in the fiscal third quarter.
You would think a company that dominates the AI chip market and is growing at these rates would be trading at a big premium, but this is why Nvidia is an intriguing stock to buy right now. The stock's forward price-to-earnings multiple is 25, which is not much higher than the average company in the S&P 500.
The stock's relatively low valuation reflects concerns about competition in the AI chip market, but Nvidia has led the GPU market for two decades. The company's pace of innovation positions it well to maintain that lead and remain the backbone of AI infrastructure.
NASDAQ: NVDA
Key Data Points
Taiwan Semiconductor Manufacturing (TSMC)
Taiwan Semiconductor (TSM 4.45%) makes chips for Nvidia and other semiconductor companies. It is well-positioned to benefit from broad spending on chips across markets such as smartphones, automotive, and data centers.
TSMC has expertise in making the world's most advanced chips, which is one reason it is the largest manufacturer, with more than 70% market share in the global foundry market, according to Counterpoint Research.
While the chip industry is historically cyclical, the stock has delivered market-beating returns since the 1990s, and analysts expect its earnings to grow at an annualized rate of 30% in the next several years. For a stock trading at 24 times this year's earnings estimate, investors should expect to earn excellent returns from holding TSMC shares.
