With Microsoft recently announcing its intentions to spend $80 billion on building data centers across the globe this year, there appears to be no let-up in spending on artificial intelligence (AI) infrastructure. Meanwhile, as companies advance their AI models, they need exponentially more chips for these models to be trained on. Both Nvidia and Broadcom have talked about customers deploying AI chip clusters of 1 million or more in the near future, which is a huge jump from what recent AI models have been trained on.
Let's look at two semiconductor stocks that should nicely benefit from the continued proliferation of AI chips.
Taiwan Semiconductor
Today, most chipmakers, such as Nvidia and Broadcom, just design chips while leaving the manufacturing to a third party. Manufacturing semiconductors is a complex task that requires a lot of technological know-how, and there is always a push for manufacturers to shrink chip size in order to increase processing power and reduce power consumption. At the same time, building foundries (chip manufacturing facilities) is a capital-intensive business (in other words, they cost a lot of money to build), and the foundries need to run near full capacity to be profitable.
How difficult it is to run a third-party foundry business can be seen with Intel, which has poured a ton of money into building foundries only for this segment to be a big money loser. Samsung's foundry business has also greatly struggled, with the unit reporting a big loss last quarter and the company announcing plans to lay off 30% of the unit's workforce and to shut down half its production lines.
However, there is one semiconductor contract manufacturer that has emerged as the clear winner in the space: Taiwan Semiconductor (TSM -2.03%), or TSMC for short. The company has seen revenue and profits booming, spurred by the AI chip boom. Last quarter, it saw its revenue climb 36% to $23.5 billion, while its earnings per ADR soared 50% to $1.94 from $1.29 a year ago.
The company has been the go-to contract manufacturer for advanced chips, given its scale and technology advantages. As its rivals have struggled, this has also given the company tremendous pricing power, which helped push up its gross margin to 57.8% last quarter from 54.3% a year ago. There have been reports that the company has raised its prices for 2025 as well. Meanwhile, it has also been expanding its capacity by building new foundries.
TSMC is one of the companies best positioned to benefit from the continued chip boom, and its stock is attractively valued, trading at a forward price-to-earnings (P/E) ratio of 19.5 and a price/earnings-to-growth ( PEG ) ratio of 0.65. A PEG ratio below 1 is generally viewed as undervalued, but growth stocks will often have PEG ratios well above 1.
Image source: Getty Images.
ASML
While TSMC manufactures semiconductor chips, ASML Holdings (ASML -1.80%) is the company that makes the equipment that it and other foundries use to manufacture those chips. ASML is the clear-cut leader in extreme ultraviolet (EUV) lithography, which is the technology used to create these advanced chips. Its EUV machines can cost upwards of $200 million.
Meanwhile, it has recently introduced its next-generation high-NA EUV technology, with these machines costing around a whopping $380 million a piece. Despite its struggles, Intel has been the first company to invest in these next-generation machines, while TSMC received its first machine for trial use toward the end of 2024. However, wider adoption of these machines is likely years away. TSMC has indicated it doesn't currently need high-NA EUV technology to manufacture current-generation high-end chips.
ASML executives are reportedly set to meet TSMC execs very soon to discuss TSMC's road map over the next few years. However, according to reports, TSMC may not need these high-NA EUV machines for mass production until at least 2030.
Nonetheless, with TSMC still needing to increase production and build more foundries, it will still need more EUV machines. ASML basically has a monopoly in the EUV space and should continue to benefit even if its newest technology does not start to bear fruit for several years down the line.
Meanwhile, Intel is looking to use high-NA EUV technology in production in 2027. It will be interesting to see if TSMC is willing to give Intel such a big head start in using high-NA EUV technology, even with its struggles. Intel still plans to invest $100 billion in adding chip manufacturing capacity in the U.S. over the next several years and has received nearly $8 billion in direct funding from the government, along with a 25% tax credit.
Interestingly, Intel being late to EUV technology in order to maximize profits while TSMC embraced the technology is part of the reason why the two companies are where they are today. That's why there is still a pretty good chance that TSMC will adopt high-NA EUV tech sooner than 2030 unless it wants to risk the script being flipped.
ASML has been going through a bit of a transition with the new technology as well as dealing with Chinese companies pushing through orders of older technology on fears of even harsher export bans around semiconductor technology. Nonetheless, as the only maker of EUV and high-NA EUV machines, it should ultimately be a long-term winner. Trading at 24 times forward earnings, the stock is reasonably priced.
