In January, China's DeepSeek AI sparked a sell-off in artificial intelligence (AI) stocks after sharing breakthroughs in developing highly efficient training and inference algorithms for large language models. In other words, DeepSeek's AI models showed maybe big tech companies don't have to spend hundreds of billions of dollars on the most advanced GPUs available for their data centers.
The sell-off accelerated recently after Nvidia(NASDAQ: NVDA) reported earnings and President Donald Trump imposed additional tariffs on China with new tariffs on Mexico and Canada. While Nvidia's earnings results beat analysts' published expectations, investors weren't fully reassured that DeepSeek's efforts and the uncertain economic environment wouldn't slow down Nvidia's rapid growth.
Many other semiconductor stocks have seen their share prices decline along with Nvidia's recently. A couple of those stocks look particularly appealing at these lower prices. These are my top two semiconductor stocks to buy now.
Image source: Getty Images.
1. Taiwan Semiconductor Manufacturing
Taiwan Semiconductor Manufacturing(NYSE: TSM), known as TSMC, is the largest chip manufacturer in the world. When Nvidia needs its latest and greatest GPUs printed and packaged, it contracts with TSMC because, as Nvidia CEO Jensen Huang said, "It's the world's best by an incredible margin."
Indeed, TSMC's technology lead is a huge advantage that helps it attract the world's biggest customers like Nvidia and Apple. As a result, it captures over 60% of the spending on semiconductor fabrication, and that percentage is growing as companies demand more high-end AI chips that only TSMC can produce. With such a large revenue base, TSMC is able to reinvest much more than its competitors in research and development, ensuring it maintains and extends its technology lead.
TSMC is also able to invest ahead of the growth it sees in the market. It announced a big step up in capital investments for 2025 in January, forecasting $38 billion to $42 billion in spending this year. That's up 34% from 2024 at the midpoint.
Management is historically very good at forecasting demand and investing appropriately to meet those expectations. However, semiconductor manufacturing is inherently a cyclical business. If demand drops significantly, TSMC still has a lot of overhead to keep its manufacturing facilities running.
The company recently announced plans to invest $100 billion in the United States. That's on top of its plans to expand its facilities in Arizona, the first of which entered high-volume production in late 2024. The new facilities will include TSMC's most advanced technology. It's possible TSMC's investment plans will help it avoid targeted tariffs impacting its business and those of its customers.
After the recent sell-off, shares trade for less than 20 times earnings. That's a great price for a company with the competitive moat of TSMC that should benefit from strong growth in demand for chips, whether from AI or other computing needs.
2. Advanced Micro Devices
Advanced Micro Devices(NASDAQ: AMD) is a distant second when it comes to developing valuable GPUs for AI training. The vast majority of big tech spending goes to Nvidia for its general-purpose chips. In fact, AMD may have lost market share over the past year, as Nvidia grew its data center revenue considerably faster than AMD despite operating from a much bigger base.
AMD also disappointed investors with its outlook for the current quarter, guiding for a 7% sequential drop in sales. When asked for clarification on the components of that drop during the earnings call, CEO Lisa Su said the data center business would be down in line with that figure. By comparison, Nvidia guided for a 10% sequential increase in revenue for its data center business.
However, the potential for AMD remains extremely high. Management expects the total addressable market for AI accelerator chips to climb to $500 billion by 2028. Even if it manages just 10% of the market, that would roughly double its data center revenue from 2024.
AMD could be the beneficiary of big tech companies looking to keep Nvidia's pricing in check or optimizing their spend for performance over time by using less expensive chips. Its growing relationships with tech companies could also benefit its share of x86 CPU servers, where it's consistently gained in the market in recent years.
Importantly, AMD trades for just 21 times earnings expectations after the sell-off in chip stocks. While future earnings expectations have come down since its most recent financial report, the drop in the stock price is severe enough that shares are worth snatching up at this point. Even after the adjustments, analysts still expect earnings growth averaging 38% over the next two years. To get that growth at this price is a great opportunity.
Don’t miss this second chance at a potentially lucrative opportunity
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Adam Levy has positions in Apple and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
