When you hear about artificial intelligence (AI) investing, you may think of the software powered by the technology or the hardware that trains the model. However, investors should also think of the chips that go into these devices to power the AI models.
The chip market is a huge investment opportunity, as these companies make chips for all competitors in the AI arms race, making them a neutral way to invest in the trend. Two of my favorite companies in this space are Taiwan Semiconductor (NYSE: TSM) and ASML (NASDAQ: ASML). Without these two, none of the technologies seen today would be possible, and both companies are vital suppliers in the AI arms race.
1. Taiwan Semiconductor
Taiwan Semiconductor is a contract chip manufacturer, which means that companies like Apple and Nvidia design the chip, and then TSMC fabricates it. This is a great position to be in, as it allows TSMC to focus on being a top-notch manufacturer and not have to worry about marketing its products. Additionally, TSMC has the unique position of being able to sell to both sides of the competition, as TSMC manufactures chips for AMD as well as other custom AI accelerators that are competing against Nvidia for market share.
As a neutral party, TSMC also has a great view of the future demand for AI chips. Over the next five years, Taiwan Semi's management is extremely bullish on the prospects of its AI-related chips. They project these chips will grow revenue at a 45% compound annual growth rate (CAGR) over that five-year period. That's rapid growth, and it all flows into the company's overall projected revenue growth rate of 20% for the next five years.
Clearly, TSMC has some massive tailwinds blowing in its favor, and thanks to its culture of continuous improvement, it will continue to be a top chipmaker for some time.
2. ASML
While ASML doesn't manufacture chips, it produces the machines required to make these cutting-edge chips. Its extreme ultraviolet lithography machines allow clients to lay the microscopic electrical traces on a chip, and it is the only company in the world with the technology to do so. This technological monopoly is unlikely to be overtaken, as it took decades of research and billions of investment dollars to get ASML where it is today.
Because ASML's machines are essentially a gateway to producing the world's most powerful chips, its machines are highly regulated. There are many machines that ASML cannot sell to China, as the Netherlands (where ASML is based) and the U.S. do not want the devices to fall into China's hands, which could allow them to gain an advantage over Western countries in many important fields. While ASML is still allowed to sell some of its lower-powered models, the list of what it is allowed to sell to China is continuously shrinking.
This caused ASML to tweak its 2025 revenue guidance from a range of 30 billion to 40 billion euros to 30 billion to 35 billion euros. However, this still indicates solid growth, as ASML generated 28.2 billion euros in sales during 2024.
Regardless, ASML's machines are required in this high-end chip manufacturing process, so as the industry grows, so will its sales. TSMC's overall growth pace for the next five years (20% CAGR) is a good clue into the general direction of the chip market, and any growth there will help ASML's sales rise.
Why are they strong buys now?
Both stocks look attractively priced at their current levels. Taiwan Semiconductor is the cheaper of the two, trading for 22 times forward earnings.
Considering that the S&P 500 (SNPINDEX: ^GSPC) trades at 22.5 times forward earnings, this shows that most investors value TSMC as a market-average stock. With how quickly Taiwan Semiconductor is expected to grow over the next five years, this seems like an error, and investors should use this cheap stock price now to their advantage to load up.
ASML isn't as cheap as Taiwan Semi, but its technological monopoly status is also priced into its stock.
At 30 times forward earnings, the stock is the cheapest it has been since the start of 2024, and this price isn't all that high when you factor in ASML's likely unassailable moat.
With both stocks trading at a discount to their normal valuations, I think right now is an excellent time to scoop up both companies and let them sit in your portfolio for at least five years. With the substantial growth expected in the chip market during that time, these two will likely crush the market and make you a solid profit along the way.
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Keithen Drury has positions in ASML, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends ASML, Advanced Micro Devices, Apple, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
