While there may be questions surrounding the validity of companies spending hundreds of billions of dollars on artificial intelligence (AI) infrastructure, the reality is, that money is being spent, a handful of companies are directly benefiting from it -- most prominent among them, chipmakers.
With those hardware companies getting paid right now, these businesses have major upside, and I think most investors would benefit from allocating the bulk of their AI investments to them.
Image source: Getty Images.
The fabricators: Taiwan Semiconductor and Micron
The chip world has several types of companies, including fabricators, designers, equipment providers, and support businesses. All of these companies have their roles in an investment portfolio, but in the context of AI investing, I like to focus on the fabricators and designers. On the fabricator side, two of my favorites are Taiwan Semiconductor Manufacturing (TSM +5.29%) and Micron Technology (MU +0.90%). These two operate in completely different sides of the industry: Taiwan Semiconductor makes logic chips while Micron designs and produces memory chips.
NYSE: TSM
Key Data Points
Taiwan Semiconductor is the largest chip manufacturer on Earth by revenue, and nearly every major AI chip designer company pays it to produce some (or most) of their high-end chips. In the logic chip world, there are differentiating factors between foundries, so this makes chip prices a bit more stable and can drive companies to use best-in-class providers like Taiwan Semiconductor.
It's different for Micron. In the memory chip industry, there aren't a ton of factors that separate one company's output from another's. This makes memory chips more of a commodity. Right now, there is a massive memory chip shortage and incredibly high demand, which has allowed memory chip makers to boost prices heavily. Any company involved in this sector is benefiting, and Micron is chief among them. Wall Street analysts expect 260% revenue growth in the next quarter and 192% grwoth for the full year. That's far faster than the 35% growth they expect for Taiwan Semiconductor.
NASDAQ: MU
Key Data Points
However, memory chip makers are all working to boost their production capacity -- but building new foundries takes years, and if they increase output to the point where supply exceeds demand, memory prices would fall, which could leave Micron in a precarious situation. Taiwan Semiconductor's future is fairly stable, but it also needs demand to persist. I think both companies have their place in the chip investment sector, and each is a strong buy.
The designers: Nvidia and Broadcom
Nvidia (NVDA +1.30%) and Broadcom (AVGO +2.03%) are chip designers -- they don't manufacture anything themselves. Nvidia is the leading designer of GPUs, which have been the most popular computing unit in the AI sector for as long as the build-out has been going on. There is really no company that can challenge Nvidia's dominance in GPUs, but Broadcom is coming at its data center market share from a different angle.
NASDAQ: NVDA
Key Data Points
Broadcom designs application-specific integrated circuits (ASICs) -- chips that are tailored for narrow types of AI workloads. Because Broadcom's chips aren't as flexible as GPUs, they underperform GPUs on a wide variety of computing tasks. However, when they are handling the workloads that they were designed for, Broadcom's custom AI chips can outperform GPUs from a cost perspective. That's a major advantage, and its hyperscaler customers are enthusiastic: Broadcom believes that its custom AI chip business could do $100 billion in sales next year.
Both Nvidia and Broadcom are expected to grow rapidly this year and next, and that trajectory could last for several years as the AI build-out is widely expected to last through 2030. That leaves several years of strong growth ahead for the chip markets, making these companies excellent investment opportunities right now.
