With the stock market going through a downturn due to uncertainties about how tariffs will (or won't) affect the economy, it's opening up several investment opportunities in the artificial intelligence (AI) realm. AI has been the dominant trend in the market since 2023, so it should come as no surprise that these stocks are the first to sell off because investors are taking gains. Some also have a premium valuation that is only deserved if there is a ton of optimism in the market.
I'm not focused on what will happen in the market in the next month or even the next year. Instead, I'm focusing on where the market is heading three to five years from now. With that mindset, AI stocks are still the best game in town, which is why I think investors should use the current dip as an opportunity to load up on some beaten-down AI stocks.
There is more growth ahead for these AI giants
There are multiple AI stocks that could be purchased right now, but I'm focusing on the ones with the best long-term outlook. That leads me to Nvidia (NASDAQ: NVDA), Taiwan Semiconductor Manufacturing (NYSE: TSM), and Broadcom (NASDAQ: AVGO). I think these three are fantastic picks, as all are expected to experience massive growth over the next few years.
Nvidia CEO Jensen Huang sees a path toward data center capital expenditures nearing $1 trillion by 2028. Although the company won't capture all of that opportunity (there's more to a data center than Nvidia's GPUs), it is slated to take a large chunk of that spend. As a result, it should have a strong next few years, making it a great stock to load up on, with it down around 25% from its highs.
Similar to Nvidia, Broadcom is slated to cash in on this massive build-out. Although Broadcom's business has many different offerings, its custom AI accelerator business is starting to take off. Custom accelerators, which Broadcom calls XPUs, compete against Nvidia's GPUs, as they are both hardware that clients can use to run AI workloads. However, workloads must be properly configured to run on an XPU, which makes them fantastic for one type of task but poor for any other.
While XPUs may be more powerful than GPUs, their one-trick pony nature will keep them from completely dominating the AI computing sector. This is OK, as there is still huge demand for its XPUs. For its three customers that have created an XPU in collaboration with Broadcom, they believe a $60 billion to $90 billion addressable market will emerge by 2027. However, it also has four other clients that are coming online with their own XPUs, which will further expand this market. With Broadcom only generating $12.2 billion in AI revenue in FY 2024, this indicates massive growth.
None of these companies can create their own chips, so they must purchase chips from chip foundries for their devices. Taiwan Semiconductor is a market leader in this area and supplies both Broadcom and Nvidia with chips for their various devices.
By being a neutral party in the chip world, TSMC has an unparalleled vision of where their industry is heading, because chip orders are often placed years in advance. Over the next five years, Taiwan Semi's management sees AI-related revenue growing at a 45% compounded annual growth rate (CAGR). Overall, management expects a revenue CAGR of nearly 20%, which indicates huge growth ahead.
This trio is expected to put up huge growth over the next few years, yet their stocks are on sale because of some short-term fears.
These stocks are trading at a discount to recent prices
Nobody knows exactly how tariffs will affect the global economy, but it's safe to say that most AI spending will likely still occur. Companies are looking for every advantage they can get over their competitors, and spending aggressively while others pull back will give them a leg up. As a result, most AI spending should still occur, as it will almost turn into a game of chicken with the AI hyperscalers.
With the recent sell-off, all these are at least 25% down from their all-time highs. Each now trades for an attractive forward price-to-earnings (P/E) ratio.
These stocks haven't been this cheap since the start of 2024, and are also nearing the valuation level of the broader market. The S&P 500 trades at 21.1 times forward earnings, so Taiwan Semiconductor already trades at a steep discount, and Nvidia and Broadcom aren't far behind.
However, we know that all three of these companies are expected to grow much faster than the market over the next few years. This makes now an excellent time to scoop up shares of these AI leaders while they are on sale, as Q1 financial results announcements will likely turn these stocks around.
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Keithen Drury has positions in Broadcom, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
