The U.S. stock market demonstrated remarkable resilience in 2024 despite challenges such as lingering inflation, high interest rates, macroeconomic uncertainties, and geopolitical tensions. Technology companies, particularly those connected to the artificial intelligence (AI) trend, provided much of the market's lift. Not surprisingly, many AI stocks have soared to dizzying heights and now trade at unreasonable valuations.
However, there is still money to be made for astute investors if they know where to look. In my view, opening small positions in these two industry leaders could be a smart move now, despite how much their share prices appreciated in 2024.
Taiwan Semiconductor Manufacturing
Looking at Taiwan Semiconductor Manufacturing (TSM 3.49%) (aka TSMC), there is a lot to be excited about. Although it's not among the flashy players designing and building fancy models and chatbots, it plays a critical role in the development of AI infrastructure.
As the world's largest contract chip manufacturer, TSMC works with almost every major AI innovator in the world, including hyperscalers, chip designers such as Nvidia and Advanced Micro Devices, and consumer tech enterprises like Apple. Not surprisingly, management expects its revenue contribution from AI processors (including AI-optimized CPUs, GPUs, and accelerators) to more than triple in 2024, when it will account for a mid-teens percentage of its total revenue.
Management also believes that AI chip demand has much further to grow in the coming years. The analysts at Precedence Research agree, forecasting that the global AI hardware market will grow from $53.7 billion in 2023 to $473.5 billion in 2033.
TSMC has emerged as a dominant player in the advanced semiconductor manufacturing space. Advanced process nodes such as 3-nanometer (nm), 5nm, and 7nm accounted for 20%, 32%, and 17%, respectively, of TSMC's wafer revenue in the third quarter. Furthermore, management is working on expanding production capacity for its next-generation 2nm chips, which it plans to roll out in late 2025.
Finally, TSMC is working to double its advanced chip packaging capacity to 70,000 wafers monthly in 2025 and 90,000 in 2026 -- better positioning the company to capitalize on the surge in demand for AI-optimized chips.
Market research firm IDC expects the global semiconductor industry to grow by 15% and the international foundry market to grow by 20% in 2025. TSMC's revenue is expected to grow at an even faster 25% in 2025. Despite this, TSMC is trading at just 10.5 times, trailing 12-month sales, a reasonable price considering its growth prospects.
With an estimated 67% share of the global foundry market in 2025, TSMC seems like a smart AI-powered stock pick.
Microsoft
Technology giant Microsoft (MSFT 1.14%) emerged as a compelling top AI pick in 2025, solidifying its position as a front-runner in the AI revolution while maintaining its dominance in traditional software markets.
Its strategic $14 billion investment in ChatGPT developer OpenAI has proved transformational. Microsoft has integrated advanced AI technologies into its core offerings, such as the Azure cloud computing platform, Microsoft 365 office productivity suite, and GitHub platform. These moves have in turn helped it drive revenue growth, improve customer retention, optimize costs, and meet competitive pressures.
Microsoft's success in monetizing these AI innovations is evident, considering that the annual revenue run rate for its AI business is expected to cross $10 billion in its fiscal 2025 second quarter (which ended Dec. 31). The company's enterprise AI solutions, mainly Copilots, have been prominent new revenue streams. The Microsoft 365 Copilot is already being used by almost 70% of the Fortune 500 companies. The number of enterprise customers using the GitHub Copilot also surged 55% quarter over quarter in its fiscal Q1.
OpenAI plans to make changes to its business structure that could benefit Microsoft. Founded as a nonprofit, OpenAI announced plans to restructure into a for-profit model in September 2024. While the nonprofit side will retain either a minority stake or nonvoting shares, the restructuring will allow Microsoft to earn profits that exceed its previously set cap of 100 times its initial investment. OpenAI also wants to remove technology licensing restrictions placed on Microsoft. These concessions could bolster Microsoft's top and bottom lines over the long run.
Microsoft's Azure cloud computing business is also a significant growth catalyst. Its revenues grew by an impressive 33% year over year in fiscal 2025 Q1. With data centers in more than 60 global regions and the rapid expansion of Azure OpenAI capabilities, it seems poised for long-term growth. The company's gaming business has also strengthened significantly since it completed the acquisition of ActivisionBlizzard in October 2023.
Beyond its operational strengths and diversified business, Microsoft has an enviable financial profile. It has managed its profitability while continuing to reinvest in itself. The company is also committed to rewarding shareholders, as is evident from the $9 billion it distributed through share repurchases and dividends in fiscal Q1.
Considering Microsoft's gifts for creating profitable new revenue sources and strengthening its core business, the company's growth trajectory could continue to be impressive in 2025.
