Finance
The best artificial intelligence (AI) growth stocks to buy now
Technology stocks have delivered excellent gains for investors since the start of 2023, with a 69% increase in the value of the shares. Technology sector Nasdaq-100 index over this period. Artificial intelligence (AI) has played a central role in this massive rally.
Technology companies, large and small, have benefited from AI adoption. Super microcomputer (NASDAQ:SMCI) And Taiwanese semiconductor manufacturing (NYSE: TSM) both have seen a nice lift thanks to the proliferation of AI.
However, the red-hot rally in technology stocks has recently come to a standstill. The Nasdaq-100 technology sector has fallen 11% in the past month thanks to a number of factors, including growing concerns about a US recession following a weak jobs report and fears that AI may ultimately fail to live up to the hype.
But the recent quarterly results of the above-mentioned companies suggest otherwise. These tech players indicate that spending on AI-related infrastructure remains solid, so it may be a good idea to buy shares of these AI companies in the wake of the recent market sell-off. Let’s look at the reasons why.
TSMC stock is too attractive to miss now
AI has given the semiconductor industry a major boost. The AI chip market is expected to experience annual growth of 38% over the next decade, generating annual revenues of $514 billion by 2033. Taiwan Semiconductor Manufacturing, popularly known as TSMC, is one of the best ways for investors to take advantage of this opportunity.
TSMC is a foundry that produces chips for fabulous semiconductor companies such as Nvidia And AMD. It also makes chips for device makers such as Appleand even Intel has engaged TSMC to produce advanced chips, despite the fact that it has its own production lines. Thus, TSMC can benefit from the proliferation of AI in multiple markets, such as data centers, smartphones and personal computers.
TSMC’s growth has accelerated thanks to robust demand for its advanced chips from the customers mentioned above. The Taiwan-based foundry giant reported a 33% year-on-year revenue increase to $20.8 billion for the second quarter of 2024. That marked a significant acceleration from the 13% year-over-year growth that TSMC reported in the first quarter.
For the third quarter, TSMC forecasts revenue of $22.8 billion, at the midpoint of expectations. That would translate into year-over-year growth of almost 32%, suggesting that demand for the company’s chips will remain healthy. As such, the 15% decline in TSMC stock over the past month presents a smart buying opportunity for investors, especially considering that analysts have increased their earnings growth expectations for TSMC lately.
Furthermore, TSMC currently trades at 29 times trailing earnings, which is a slight discount to the Nasdaq-100 the index’s average earnings multiple of 31 (using the index as a benchmark for technology stocks). It seems like a no-brainer to buy this AI stock now, given its stellar growth and attractive valuation.
Demand for AI servers is driving stunning growth for Supermicro
The TSMC-manufactured chips deployed in data centers to tackle AI workloads must be mounted on server racks, which has led to a surge in demand for Supermicro’s offering over the past year.
Supermicro produces server and storage solutions, and the company has gained traction in the AI server market thanks to its modular offerings that help data center operators reduce energy costs. Revenue in the recently concluded fiscal year 2024 more than doubled year over year to $14.9 billion, compared to $7.1 billion the year before.
However, Supermicro stock dropped 20% in one session tracked the results after missing Wall Street’s earnings expectations due to shrinking margins. The company has been aggressively investing to increase its manufacturing capacity to meet the growing demand for AI servers, which is precisely why its non-GAAP gross margin fell to 14.2% from 18.1% in the prior year in fiscal year 2024.
The company has expanded its manufacturing capacity in several locations around the world with the aim of ramping up production capacity of liquid-cooled servers, which are increasingly gaining ground in AI data centers to reduce electricity consumption and improve performance. Mordor Intelligence estimates that liquid-cooled data centers could achieve 23% annual growth through 2029.
So Supermicro is doing the right thing by focusing on capacity expansion now, as it should be able to capture a larger share of these high-growth opportunities. Furthermore, the overall AI server market is expected to grow 30% annually through 2033, with Supermicro growing much faster than this market.
This suggests that the company is gaining market share in the AI server space, and therefore sacrificing margins in the short term seems like the right thing to do given the long-term opportunities. Supermicro management believes margins will return to normal range by the end of fiscal 2025. Analysts remain optimistic about net growth prospects following fiscal 2024 earnings increase of 87% to $22.09 per share.
Most importantly, Supermicro now trades at just 24 times current earnings and 13 times forward earnings – a nice discount to the Nasdaq-100 index. Investors should consider adding this fast-growing company to their portfolios while it is still in trouble.
Should You Invest $1,000 in Semiconductor Manufacturing in Taiwan Now?
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Hard Chauhan has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Advanced Micro Devices, Apple, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls to Intel and short August 2024 $35 calls to Intel. The Motley Fool has one disclosure policy.
Stock Market Selloff: The Best Artificial Intelligence (AI) Growth Stocks to Buy Now was originally published by The Motley Fool
