Most of the growth happening in artificial intelligence (AI) has been driven by software and chatbots, but that means we haven't seen anything yet. Morgan Stanley's latest research says it's still the early innings, with corporate spending estimated to reach $10 trillion in the AI investment cycle.
Investors can do well by sticking with the blue chip leaders in the semiconductor industry, as chips are the foundation of AI. Here are two quality chip stocks with compelling valuations to start 2026.
Image source: Getty Images.
Nvidia
Training AI models requires lots of processing power, which can sometimes mean thousands of graphics processing units (GPUs) working simultaneously in data centers. Nvidia (NVDA 3.04%) not only makes the most powerful GPUs, but it's also run by a smart management team that knows it needs to stay a few steps ahead of the competition to maintain its edge.
Demand for Nvidia's chips remains robust, driving a 66% year-over-year increase in its data center business in the recent quarter. But it's widening its competitive moat by expanding beyond GPUs.
Nvidia is offering complete computing systems that bundle multiple chips and components. Its new Rubin platform could be a game-changer when it starts shipping later this year. Compared to its current Blackwell generation all-in-one platform, Rubin will use six different chips, including Nvidia's Vera central processing units (CPUs), Rubin GPUs, and Bluefield-4 data processing units (DPUs), to deliver an estimated 5x of what Blackwell produces, leading to a powerful and more efficient AI supercomputer.
NASDAQ: NVDA
Key Data Points
With Rubin, Nvidia is providing the compute power to run tomorrow's data centers, or AI factories. Rubin promises to significantly reduce the cost of running advanced AI models for data centers. This will enable faster development and adoption of agentic AI, which can perform a series of tasks autonomously for the user.
Nvidia is thinking about where AI is headed in 10 years and building the products needed for that future today. The incredible demand for its products means it is effectively printing money from the prices it can set, with net income reaching $99 billion over the last year on $187 billion of revenue. Nvidia's profitability and dominant lead in the GPU market are why it has earned blue-chip status for investors.
Nvidia investors should expect solid returns from here, as the stock trades at a conservative 24 times forward earnings estimates. This valuation provides the potential for excellent returns over the near and long terms.
Image source: Taiwan Semiconductor Manufacturing.
Taiwan Semiconductor Manufacturing
Taiwan Semiconductor Manufacturing (TSM 3.58%) belongs on any list of AI blue-chip stocks. It's been around for decades, making the chips that Nvidia and other companies design. Its competitive moat is built on extensive expertise and manufacturing capacity to meet a high volume of orders every year. The chips it makes are used in everything from data centers to smartphones.
TSMC is seeing strong demand for its services. In the fourth quarter, revenue in U.S. dollars grew 25% year over year to $34 billion. It generates very high margins, reflecting its dominant market share. For the full year, it earned $55 billion in net income on $122 billion in revenue.
NYSE: TSM
Key Data Points
Investors may be concerned about the cyclical demand for chips. Like any other business, TSMC usually experiences weak demand during an economic recession. But the company's revenue has increased at a compound annual rate of nearly 17% over the last 10 years, which included a few economic shocks. Management expects the demand for AI chips to grow by over 50% on an annualized basis through 2029.
The stock is priced even cheaper than Nvidia, trading at just 23 times forward earnings. Given TSMC's dominant position in chip manufacturing, this discount may undervalue its long-term growth prospects. Investing in Taiwan Semiconductor could pay off not only in the long term, but also in 2026.
