When a group of stocks consistently outshines the broader market, analysts love to group them together to make them easier for investors to track. From the inception of the FAANG acronym in 2017 by CNBC’s Jim Cramer to the more recent “Magnificent Seven” identified by Bank of America analyst Michael Hartnett, the world of investing has seen its fair share of star-studded groupings. However, as we step into 2024, a new set of stocks is vying for the spotlight – the “AI Five.”
2024: The Era of the “AI Five”
With the Magnificent Seven already making waves in the market this year, the underperformance of Tesla and Apple has prompted analyst Glen Kacher to propose a shift in market leadership. Given the pervasive influence of artificial intelligence (AI) among top-performing stocks, Kacher has outlined a new elite group of companies pushing the boundaries in this burgeoning field – the “AI Five:”
- Nvidia
- Taiwan Semiconductor Manufacturing (NYSE: TSM)
- Advanced Micro Devices
- Broadcom
- Microsoft
Today, we delve into why two stocks from this exclusive group present an attractive buying opportunity.
The Powerhouse: Nvidia
At the beginning of 2023, Nvidia boasted a market capitalization of roughly $360 billion. Fast forward 16 months, and the company has added a staggering $1.8 trillion to that figure, firmly establishing itself as the third-largest company globally by market cap, only trailing tech behemoths Microsoft and Apple. This meteoric rise is primarily attributed to Nvidia’s cutting-edge graphics processing units (GPUs) tailored for the data center, renowned for their prowess in handling AI workloads.
The introduction of the H100 GPU propelled Nvidia’s data center revenue to new heights, soaring by an astounding 217% in fiscal 2024 to reach $47.5 billion. With the rollout of the H200, promising double the inferencing speed while consuming half the energy of its predecessor, Nvidia is well-positioned to maintain its dominance in the realm of AI computing. Inferencing, the process of feeding real-time data to AI models for predictive analysis, is set to be revolutionized, ushering in faster and more precise outputs for end-users.
Nvidia’s GPUs rank at the top of many data center operators’ wish lists, including tech titans like Amazon, Microsoft, and Google. The recent agreement with Meta Platforms to procure 350,000 H100 chips, valued at a staggering $9 billion, for training its Llama large language models exemplifies the robust demand for Nvidia’s cutting-edge technology. Despite facing supply constraints hindering even greater revenue growth, Nvidia remains a pivotal player driving the AI revolution forward.
As investors eagerly await the deployment of Nvidia’s new Blackwell architecture, slated for release next year, featuring the powerful B200 GPU in a DGX configuration that promises 3 times faster training performance and 15 times faster inferencing speed compared to its predecessor, expectations are running high for accelerated development and deployment of AI applications.
Market analysts project Nvidia to deliver $24.44 in earnings per share for fiscal 2025, reflecting an impressive 88% surge from the previous fiscal year. With Nvidia’s current stock price at $880.08, the forward price-to-earnings (P/E) ratio stands at 36. While trading at a 20% premium to the current Nasdaq-100’s P/E ratio of 30.1, Nvidia’s robust growth trajectory suggests that the stock’s valuation might soon appear modest, providing a compelling case for potential investors to seize the opportunity before it slips away.
The Backbone: Taiwan Semiconductor Manufacturing (TSM)
Undoubtedly, Taiwan Semiconductor Manufacturing (TSMC) stands as a linchpin in the global tech landscape today. Responsible for manufacturing over half of the world’s chips catering to diverse industries like data centers, smartphones, automobiles, and consumer electronics, TSMC holds a position of unparalleled significance. Notably, TSMC serves as the preferred manufacturing partner for industry leaders like Nvidia and Advanced Micro Devices, emphasizing its pivotal role in driving technological innovation.
Despite grappling with an 8.7% drop in revenue to $69.3 billion in 2023 due to supply imbalances plaguing various end markets since 2022, TSMC’s strategic positioning and market dominance remain unscathed. As a key enabler of cutting-edge technologies and a crucial collaborator for leading semiconductor designers, TSMC continues to shape the future of the semiconductor industry.
TSMC’s Revenue Growth Amidst Increasing Demand for High-Performance Chips
Changing Tides: A Look at Revenue Trends
Initially hit by rising inflation and interest rates that curbed consumer spending on big-ticket electronics, TSMC’s revenue saw a significant shift in the fourth quarter. Despite a 1.5% year-over-year decrease, revenue surged by a remarkable 13.6% sequentially. This upturn was notably driven by a substantial 17% growth in the high-performance computing (HPC) segment and an impressive 27% growth in the smartphone segment.
High-Performance Computing on the Rise
With the HPC segment contributing 43% to TSMC’s total revenue in 2023 and showing consistent growth, tech giants’ push to fill data centers with AI chips has been a key driver. As AI-related data center chips witness robust demand, TSMC anticipates the HPC sector to be the fastest-growing aspect of its business, further increasing its share of total revenue.
Smartphones: A Long-Term Demand Driver
Alongside the HPC growth, smartphones are expected to play a vital role in sustaining demand as AI processing shifts from data centers to devices. The introduction of Apple’s groundbreaking 3-nanometer A17 Pro chip, aimed at enhancing AI workloads in applications like Siri, signifies a strategic move into the AI landscape. Furthermore, ongoing negotiations with tech heavyweights like Alphabet and OpenAI for AI chatbot integration on future iPhones are poised to bolster TSMC’s position in the semiconductor market.
The Path Ahead: Expanding Revenue Prospects
Anticipating robust growth, TSMC forecasts revenue to soar by over 20% in 2024, marking a sharp reversal from the decline experienced in the previous year. The optimistic outlook extends to 2025, with Wall Street predicting another 20% growth, propelling revenue beyond $100 billion for the first time. Remarkably, with a modest P/E ratio of 27.2 based on its 2023 earnings per share, TSMC’s stock valuation presents a compelling investment opportunity compared to industry peers like Nvidia and the Nasdaq-100 index.
Looking Beyond: Market Insights
The surge in demand for complex chips capable of handling advanced computing tasks signals a positive trajectory for TSMC. As the company gears up to meet the evolving needs of the AI landscape, there is a clear indication of long-term growth potential and market relevance.