Artificial intelligence (AI) promises to bring significant advances to the global economy, which could result in higher worker productivity, faster product development, and more efficient supply chains. The lure of these benefits is creating tremendous demand for leading semiconductor companies that provide cutting-edge processors to enable AI.
Despite sizable gains for top chip stocks in 2024, here are two that still trade at reasonable valuations that could support attractive returns in 2025, and potentially for years to come.
1. Micron Technology
Every computer needs memory and storage to transfer and use data. This is as much a need for AI-optimized data centers as your phone or PC. As demand for AI grows, it is driving strong growth for Micron Technology's (NASDAQ: MU) advanced memory and solid-state storage (SSD) products used for high-performance computing.
Micron achieved record revenue in the most recent quarter, and the company's operating leverage is also allowing a lot of that additional revenue to generate higher profits. An 84% year-over-year increase in revenue last quarter turned a year-ago loss of $1.12 into net income of $1.67 per share. These strong results have sent the stock sharply higher since 2022, but the recent dip is a great buying opportunity, given management's outlook for more growth in 2025.
Micron operates in a competitive market that can be susceptible to inconsistent financial results, but it is currently enjoying an upswing. Revenue from products sold to data centers grew more than 400% year over year and 40% over the previous quarter.
Micron spent years investing in data center SSD products, and it's now reaping the rewards. The company's outlook calls for record revenue this year, with growth in earnings and positive free cash flow. Long term, management expects the market for high-bandwidth memory to grow from $16 billion in 2024 to over $100 billion by 2030.
Investors shouldn't expect smooth sailing for Micron, as swings in selling prices for memory and storage can lead to lumpy revenue performance, but the long-term demand curve looks favorable and could drive profitable growth over the next decade.
Weighing the near-term risks and long-term opportunities, the stock trades at a fair forward price-to-earnings (P/E) ratio of 14, which could support more gains in 2025.
2. Taiwan Semiconductor Manufacturing
Taiwan Semiconductor Manufacturing(NYSE: TSM) is one of the best chip stocks to hold for the long term. As the world's leading foundry, it makes chips designed by other companies, and its customer list includes Nvidia, Advanced Micro Devices, Qualcomm, and Apple.
The soaring demand for advanced processors doubled the share price over the last year, but it still trades at a reasonable 23 times 2025 earnings estimates -- an attractive discount to the S&P 500 (SNPINDEX: ^GSPC) average P/E of 30.
TSMC is well-positioned to capture the growing demand for AI chips due to its manufacturing expertise and diverse customer base. Because it focuses exclusively on making chips, not designing them, the company has been able to spend decades investing all its available capital in building the most sophisticated manufacturing processes to serve customers.
TSMC expects 2024 revenue to be up nearly 30% in U.S. dollars. Management has guided for revenue from AI server chips to triple. While AI server chips represent only a mid-teens percentage of revenue, the strong demand is also leading to improving margins and earnings growth prospects.
Moreover, TSMC has a long history of generating high returns on capital, so when it raises capital spending, it signals more profitable growth ahead. The company is expanding its global manufacturing footprint across the U.S., Japan, and Europe, to support demand for advanced chips in the coming years.
These plans reflect management's view that demand for AI-related applications is just beginning. With the consensus Wall Street estimate calling for earnings to grow 31% on an annualized basis, the stock's valuation is more than reasonable. At the current 23 forward P/E, investors should expect the stock to deliver annual returns that are consistent with the company's earnings growth. That could lead to outstanding returns for TSMC shares if analysts' estimates are on the money.
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John Ballard has positions in Advanced Micro Devices and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Nvidia, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
