The stock market has ridden the excitement for artificial intelligence (AI) to new heights. It’s not all hype; according to McKinsey, AI could add as much as $13 trillion to the global economy by 2030. Sure, some stocks have risen faster than others, so perhaps some stocks have gotten too expensive.
Here is the investment pitch for each.
At this writing, Taiwan Semiconductor stock trades at a forward P/E ratio of just under 28. At the same time, analysts estimate the company’s earnings will grow by an average of 31% annually over the next three to five years. That’s a PEG ratio of 0.9, indicating the stock is a bargain for its expected future growth.
So, why is the stock so cheap? Taiwan is near China, which claims it is part of its territory and has threatened to invade the country. This is a legitimate risk that investors should consider before buying the stock. That said, it’s impossible to know what will happen. A forceful invasion might spark retaliation from the U.S. and other countries because of Taiwan’s importance to the world’s chip supply chain. The U.S. and Taiwan Semiconductor have taken steps to derisk from China, including cutting back shipments of advanced AI chips to China and investing roughly $65 billion to build new foundries in Arizona.
Ultimately, Taiwan Semiconductor is too good a company to ignore the stock at this valuation, even with the geopolitical noise around it.
Jake Lerch (Tesla): My choice is Tesla.
Granted, most investors know Tesla as an electric vehicle company, but there’s more under the hood for those willing to look.
In its most recent quarter (the three months ended Sept. 30), Tesla reported total revenue of $25.2 billion. Some $20 billion, or 80% of the total, came from automotive revenue. The remaining $5.2 billion was split almost equally between Energy Generation & Storage ($2.4 billion) and Services ($2.8 billion). Those segments also grew significantly faster than Tesla’s automotive division:
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Business Segment
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YOY Revenue Growth Rate
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Automotive
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2%
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Energy Generation & Storage
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52%
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Services and Other
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29%
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Data source: Tesla Q3 2024 quarterly update. YOY = year over year.
Moreover, as Tesla’s AI investments begin to bear fruit, AI will likely drive growth for the company.
Consider this: One could view Tesla’s vehicles as more than simply products; they could also be platforms. Teslas are equipped with multiple sensors designed to capture video and data, then relay it to Tesla’s Dojo or Cortex supercomputers. Those systems can then analyze the data to constantly improve what could become the company’s crown jewel: its Full Self-Driving (FSD) system.
If Tesla can develop truly autonomous FSD, the company’s market cap could expand by an entire order of magnitude — which is astounding considering that Tesla is (as of this writing) valued at more than $1 trillion.
That’s to say nothing of Tesla’s other bets that rely on AI advancements: its Optimus humanoid robot, robotaxis, and perhaps unimagined (or at least unrevealed) uses for its massive supercomputer clusters.
In other words, yes, Tesla is an AI company. What’s more, when all is said and done, Tesla’s AI assets are so impressive that they may power the company to unforeseen heights over the next decades. AI-oriented investors should take notice.
Will Healy (Qualcomm): Of the major AI chip stocks, few appear better positioned for buyers than Qualcomm. It had become an afterthought for investors as the 5G upgrade cycle ran its course.
However, that changed thanks to AI, as smartphones equipped with the Snapdragon 8 Gen 3 or the Elite Mobile Platform chipsets delivered on-device AI to smartphone users. Moreover, Qualcomm has thought ahead to the day when smartphone use would fall. Hence, the company expanded into Internet of Things/industrial, automotive, and PC chips.
In fact, its automotive segment was the fastest-growing segment in fiscal 2024 (ended Sept. 29), increasing revenue by 55%. Still, it only makes up just over 7% of the company’s revenue. For now, handsets were 64% of the company’s revenue, and that segment’s revenue grew 10% yearly amid an AI upgrade cycle.
Admittedly, Qualcomm’s handset business faces notable challenges, and it is in a legal dispute with Arm Holdings, which Qualcomm depends on for some chip designs. The dispute dates back to 2019, though Qualcomm has continued to thrive despite that legal battle.
Also, Apple has tried for years to best Qualcomm’s designs only to extend the supply agreement.
For now, Qualcomm benefits from an upcycle. In fiscal 2024, the company’s $39 billion in revenue increased by 9%. However, in Q4, revenue rose by 18%, signaling an upward move in the cycle is benefiting the company. Also, costs and expenses rose by only 3%, allowing Qualcomm’s $10 billion in net income for fiscal 2024 to surge 40% higher compared with year-ago levels.
Amid this growth, Qualcomm trades at a P/E ratio of about 18, far below other chip industry competitors. While the dispute with Arm carries some risk, Qualcomm’s diversification into other areas will make it difficult for such challenges to stand in the way of its long-term success.
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*Stock Advisor returns as of November 11, 2024
Jake Lerch has positions in Nvidia and Tesla. Justin Pope has no position in any of the stocks mentioned. Will Healy has positions in Advanced Micro Devices and Qualcomm. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Nvidia, Qualcomm, Taiwan Semiconductor Manufacturing, and Tesla. The Motley Fool has a disclosure policy.
The Artificial Intelligence (AI) Boom Isn’t Over. 3 AI Stocks to Buy Right Now. was originally published by The Motley Fool
