Despite the market sell-off centered around tech stocks, investors need to keep their focus on the long term. We're still in the early innings of the AI investment wave. We've barely scratched the surface of integrating AI into business and regular life, and there will be more development in this space over the next five years.
As a result, I think investors need to look at which stocks look like strong bargains, as the market is full of many opportunities to purchase the best AI stocks on sale.
The AI race is still in full swing
I'm focusing on four companies that are key suppliers in the AI race: Taiwan Semiconductor (NYSE: TSM), ASML (NASDAQ: ASML), Nvidia (NASDAQ: NVDA), and Broadcom (NASDAQ: AVGO). These are critical companies and without them, the AI revolution wouldn't look the same.
I'll start with Taiwan Semiconductor (TSMC), as all roads lead to it. Taiwan Semiconductor is the world's leading chip foundry, and clients like Broadcom and Nvidia come to it with chip designs that they want to have fabricated. Because TSMC has leading technology and a strong track record for innovation, it's the top option in this space, which gives it great insight into what trends are occurring in the chip industry.
Over the next five years, Taiwan Semiconductor's management expects AI-related revenue to grow at a 45% compound annual growth rate (CAGR) pace. That's monster growth, but it makes sense in the grand scheme of things. TSMC expects its revenue compound annual growth rate to approach 20%, which is fantastic considering the company's size.
This massive demand is also why Taiwan Semiconductor announced an additional $100 billion investment, on top of the $65 billion it already committed, in building more facilities in the U.S. TSMC's management said the company is building where the demand is, and with its U.S. production facilities already selling out capacity through 2027, it's clear that the U.S. is a great place to build new factories.
This also boosts ASML, as ASML makes machines that every high-end chip fabricator needs. ASML's top machine is an extreme ultraviolet (EUV) lithography machine that helps lay the microscopic electrical traces on chips. Nobody in the world has ASML's technology, giving it a technological monopoly status. As a result, when TSMC announces capacity expansion, you should automatically think that ASML will benefit.
Nvidia and Broadcom are large customers of TSMC, and they are a large part of the reason it is projecting a massive increase in AI-related revenue growth. Nvidia makes graphics processing units (GPUs) that are incredibly useful for handling large and complex computing tasks like AI training. Nvidia has a strong grip on this market and shows no signs of slowing down.
Broadcom has a similar product line, as it has helped some tech giants design custom AI accelerators called XPUs. XPUs can outperform GPUs in specific tasks, as a workload must be set up in a particular way to take full advantage of an XPU design. This makes them critical in developing AI models, but not the greatest at other workloads that GPUs can sometimes be assigned.
There's a massive market for both of these products, and although they will be competing for sales, there's a large enough market that both of them can thrive.
All four of these companies have incredibly strong tailwinds blowing in their favor, and it would take a lot to derail the AI investment movement in the industry. As a result, I think all of these companies will be just fine over the long term. But right now, each one looks like it can be purchased for a great price.
All the stocks are much cheaper than they've been over the past year
Because each company is growing so much, I'll focus on its forward price-to-earnings (P/E) ratio, which is a better measure of where a company is going.
Taiwan Semiconductor is clearly the cheapest, at less than 20 times forward earnings, which is an unbelievable bargain. If you would make me choose one stock from this group of four, it would undoubtedly be TSMC.
However, the price tags on ASML, Nvidia, and Broadcom are also much cheaper than they've been in the past, giving investors the green light to invest in some of these AI leaders.
While these four could experience some more short-term pain, I have a hard time picturing a future in which they aren't significantly higher five years from now. I'm using today's weakness as an opportunity to scoop up these stocks for a great price.
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Keithen Drury has positions in ASML, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends ASML, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
