Nvidia (NASDAQ:NVDA) has become the dominant force in the AI ​​data center chip industry. As big tech increases its spending on new artificial intelligence (AI), Nvidia’s cutting-edge graphics processing units (GPUs) have been essential to their needs for fast computing power.
Nvidia controls about 80% of the AI ​​chip market. As a result, its stock price skyrocketed, joining the $1 trillion club last summer when it hit $3 trillion in market value on June 5. Among the few companies with a market capitalization of $1 trillion or more, it is the only one that focuses exclusively on semiconductors.
However, two others semiconductor companies Benefiting from the current AI trend could soon join Nvidia in that upper echelon of mega-cap stocks. Aided by several growth drivers beyond AI, they could have plenty of staying power once they enter the $1 trillion club.
1. Semiconductor Manufacturing in Taiwan
Semiconductor manufacturing in Taiwan (NYSE:TSM), or TSMC, is the world’s largest semiconductor foundry. Today, most semiconductor manufacturers don’t make the chips they design. Companies like Nvidia outsource this process to manufacturing specialists like TSMC.
TSMC is investing heavily in capital and engineering R&D to build factories capable of printing ever-faster, more powerful and more energy-efficient chips – and it makes more of them than anyone else. This has created a virtuous cycle: because it offers cutting-edge capabilities, it receives more business from chip designers. The profits generated by these transactions allow it to reinvest further in the next generations of manufacturing processes.
Since TSMC’s processes can be applied to semiconductors for all kinds of applications, the foundry is not dependent on any specific cases like artificial intelligence to meet demand for its services. Instead, the endless march toward faster, more energy-efficient computing is driving demand for its manufacturing capacity.
That said, AI has certainly been a catalyst for TSMC recently. Management expects its AI revenue to grow at a compound annual rate of 50% over the next five years. By 2028, the company estimates that AI chips will account for more than 20% of its total business.
As AI fuels TSMC’s growth, analysts expect its results to grow at an annualized rate of more than 20% over the next five years. While this doesn’t match the eye-popping recent growth of some chip designers like Nvidia, TSMC is operating in a much more predictable and stable industry because it serves a much broader customer base. Its forward P/E ratio of 26.5 is a fair price to pay for the stock.
Its market capitalization currently stands at around $685 billion. It would need to increase by about 46% to reach the $1 trillion mark, which is unlikely to happen in the near term. But TSMC’s steady growth makes it a must-have for achieving this long-term goal. And based on management’s expectations for AI revenue growth, “the long run” might only last a few years.
2. Broadcom
Broadcom (NASDAQ:AVGO) is one of the world’s largest chipmakers, with a broad portfolio of designs for different end markets. AI has been a driver of its bottom line lately: its AI revenue quadrupled year over year during the first quarter of the company’s fiscal 2024.
Broadcom builds AI chips with a focus on solving the networking challenges of moving large amounts of data. As AI data center clusters grow, it becomes increasingly important to ensure that data can move quickly and efficiently from one processor to another. This allows large tech companies to get the most out of expensive GPUs that they have spent billions of dollars to acquire or develop. As the size of these networks increases, demand for Broadcom chips could grow exponentially.
But its semiconductor business is diversified beyond AI. It also makes chips for smartphones, broadband access and data storage. It produces the best network chips for smartphones and broadband that require advanced engineering capabilities, which has allowed it to capture majority shares in the markets in which it operates. This leads to a virtuous circle, allowing it to reinvest in R&D to improve its products and stay ahead of its competitors. The company spent more than $5 billion on R&D last year.
Broadcom also has a software business that includes the recently acquired VMWare. The deal with VMWare consolidated its position in virtualization and mainframe software, which complements security software, DevOps, etc. She often manages to win sales for several solutions: 80% of her customers use at least five of her services.
AI is expected to fuel strong growth for Broadcom over the coming years as big tech continues to invest heavily in data centers. With its existing businesses in wireless, networking and software, it has a stable foundation. This should support strong growth and margins are expected to increase after full integration of VMWare.
Broadcom shares currently trade at around 30 times forward earnings. This valuation should be supported by strong growth over the next five years. Based on its current market cap of $650 billion, Broadcom looks poised to join the $1 trillion club within this time frame.
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Adam Levy holds positions in semiconductor manufacturing in Taiwan. The Motley Fool ranks and recommends Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Mad Motley has a disclosure policy.
2 Artificial Intelligence (AI) Semiconductor Stocks That Could Join Nvidia in the $1 Trillion Club was originally published by The Motley Fool
