All three of these stocks are poised to benefit from the boom in artificial intelligence (AI) chips.
Technology stocks have been driving the market higher in recent years, driven by powerful trends such as artificial intelligence (AI). Let's take a look at three of these tech stocks and why they may be good choices to buy and hold for the long term.
1. NVIDIA
No company has benefited more from AI than chipmakers NVIDIA (NVDA 1.75%)And there's every reason to believe the company and its shareholders will continue to benefit from current AI trends.
Nvidia's graphic processing units (GPUs) power the AI training and inference needed to power AI applications. While the company isn't the only GPU maker, its chips have become the industry standard because programmers are generally trained using its CUDA software platform. This gives the company a wide berth, as getting programmers to learn other platforms would be time-consuming and costly.
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AI is still in its infancy, and Nvidia is well positioned to continue riding the wave as demand for its chips soars. The company sees big demand from data center customers, but the technology is also likely to spread to other sectors, such as automotive. Tesla Considering how much computing power would be put into the company's vehicles, CEO Elon Musk has proposed that the vehicles could be used as a distributed computing network.
On top of that, the company is rapidly innovating, unveiling new and improved GPU architecture designs such as the recently announced Blackwell, and has already unveiled its next-generation GPU architecture, Rubin, due next year.
The stock is trading at a forward price-to-earnings (P/E) ratio of about 48 times, making it a great stock to buy and hold for the long term, as it looks undervalued given its current growth and future prospects.
NVDA PE Ratio (Forward) data from YCharts
2. Taiwan Semiconductor Manufacturing
Another company jumping on the AI chip bandwagon Taiwan Semiconductor Manufacturing (TSM -0.23%)The company, also known as TSMC, is a major semiconductor contract manufacturer that makes chips for Nvidia and other semiconductor companies at its own foundries.
TSMC is expanding its production capacity as demand for AI chips outstrips supply. The company is expanding and building new manufacturing facilities (fabs) while driving new technological innovations, including a transition to 2-nanometer production technology. Increasing chip density allows more chips to fit on a wafer, which increases production capacity while also improving chip performance and power consumption.
Nvidia's success has prompted a growing number of companies, including traditional rivals such as Google, to develop their own AI chips in an attempt to grab a piece of this huge market. Advanced Micro Devices Cloud computing companies, etc. Amazon and alphabetThis puts TSMC in a favorable position as chipmakers scramble to secure limited production capacity, giving the company greater pricing power — and the company has signaled it plans to raise prices soon.
Trading at a forward price-to-earnings (P/E) ratio of 27, an attractive valuation given the long-term growth outlook, makes it a solid stock to buy and hold for the long term.
TSM PE Ratio (Forward) data from YCharts
3. ASML
Continuing with the theme of tech stocks benefiting from the AI chip boom: ASML (ASML -2.36%)The company makes the equipment that companies like TSMC use to make semiconductors, and as more AI chips are produced and factories need to expand, more equipment will be needed to make those chips.
ASML will benefit from increased demand for its semiconductor equipment and the introduction of its latest technology, high numerical aperture extreme ultraviolet lithography systems (high NA EUV). The new systems enable manufacturers to make transistors smaller and fit more transistors on a silicon wafer. ASML says its new high NA EUV technology will improve manufacturing productivity, reduce production costs and increase chip functionality.
The company plans to ship the latest systems to its three biggest customers by the end of the year. It's not cheap, costing $380 million, but it will be a big revenue driver for ASML as chipmakers seek the latest technology to produce the most chips to meet the insatiable demand for AI chips.
ASML PE Ratio (Forward) data from YCharts
ASML shares are trading at a forward price-to-earnings (P/E) ratio of about 49, but the new system is expected to help revenue and profit growth surge next year, with adjusted earnings per share (EPS) expected to rise from an estimated $20.48 this year to $31.79 in 2025. This brings the company's valuation down to an attractive forward P/E ratio of 32. Given the boom in AI chips, this is an attractive valuation and makes ASML another strong stock to buy and hold for the long term.
Suzanne Frey, an executive at Alphabet, serves on The Motley Fool's board of directors. John Mackey, former CEO of Amazon subsidiary Whole Foods Market, serves on The Motley Fool's board of directors. Jeffrey Saylor owns shares in Alphabet. The Motley Fool owns shares of and recommends ASML, Advanced Micro Devices, Alphabet, Amazon, NVIDIA, Taiwan Semiconductor Manufacturing, and Tesla. The Motley Fool has a disclosure policy.
