Exploring AI-Focused Semiconductor Companies Worth Investing in by 2025
With tech giants like Microsoft throwing down the gauntlet with a planned $80 billion investment in global data centers this year, the proliferation of artificial intelligence (AI) chips shows no signs of slowing. As companies push the boundaries of their AI models, the demand for chips skyrockets, with Nvidia and Broadcom predicting future deployments of AI chip clusters nearing the millions.
Let's examine two semiconductor stocks poised to benefit from this AI chip boom.
1. Taiwan Semiconductor
The manufacturing of these powerful chips is no easy feat. While tech companies like Nvidia and Broadcom design the chips themselves, the actual manufacturing process is an intricate, capital-intensive endeavor. Third-party foundries (facilities) specialize in this complex task but rely on a high demand-to-capacity ratio to turn a profit.
Unfortunately, many foundries have struggled. A notable example is Intel, which has poured substantial funds into founding facilities but saw this segment bring in significant losses. Samsung’s foundry unit also reported a substantial loss last quarter, prompting the company to announce workforce layoffs and half its production line shutdowns.
Yet, one semiconductor contract manufacturer has consistently proven its mettle: Taiwan Semiconductor (TSM), or TSMC for short. The company's revenue and profits skyrocketed last quarter, climbing 36% to $23.5 billion and 50% to $1.94, respectively. Credit TSMC's position as the go-to contract manufacturer for advanced chips and its robust technological advantages. The company's strong foothold has granted it substantial pricing power, which pushed its gross margin to 57.8% last quarter from 54.3% the year prior.
TSMC looks primed to capitalize on the continued chip boom and is notably undervalued, with a forward price-to-earnings (P/E) ratio of 19.5 and a price/earnings-to-growth ( PEG ) ratio of 0.65 – both indicative of relative undervaluation.
2. ASML
ASML Holdings is the company responsible for manufacturing the equipment used in the creation of these advanced chips, boasting a commanding presence in extreme ultraviolet (EUV) lithography – the technology essential for creating these state-of-the-art chips. Its EUV machines can cost millions, representing a significant investment for chip makers.
While ASML faces challenges, its EUV technology remains in high demand with tech giants like Intel and TSMC. With ASML's high NA EUV machines expected to cost around $380 million, Intel was the first to invest in these advanced machines, followed by TSMC's eventual adoption later in 2024. Despite the hefty price tag and prolonged time-to-market, TSMC still needs these machines to increase production and grow its capacity.
As the only maker of EUV and high-NA EUV machines, ASML appears well-positioned for long-term success, trading at just 24 times forward earnings – a reasonable valuation considering its market dominance. However, ASML is currently going through a period of transition due to its new technology and increased demand from Chinese companies. Despite this, the company's future remains bright.
In the context of investing in semiconductor stocks, Taiwan Semiconductor's strong financial performance and position as a go-to contract manufacturer for advanced chips make it an attractive option, given its undervalued forward price-to-earnings ratio of 19.5 and price/earnings-to-growth ratio of 0.65.
Given the high demand for EUV lithography technology essential for creating advanced chips, ASML Holdings, the company responsible for manufacturing such equipment, remains a vital player in the finance sector. Despite facing challenges, ASML's dominance in EUV technology and the significant investment it requires make it a solid choice for long-term success, with a reasonable valuation of 24 times forward earnings.
