Chip stocks such as Nvidia (NASDAQ:NVDA) have been on an absolute tear over the last 18 months. After falling over 60% from all-time highs in 2022, NVDA stock has returned over 700% in the last year and a half, primarily due to the artificial intelligence (AI) megatrend.
Nvidia is a semiconductor company that designs and sells GPUs, or graphics processing units, used to run several AI applications. The robust demand from AI companies allowed Nvidia to report revenue of US$60.9 billion in fiscal 2024 (ended in January), up from US$26.9 billion in fiscal 2023. Its operating income more than quadrupled from US$5.57 billion to US$33 billion in this period.
Valued at a market cap of US$2.26 trillion, Nvidia is currently the third-largest company globally and has returned an astonishing 19,720% to shareholders in the last decade. Despite its outsized gains, Nvidia’s growth story is far from over.
For instance, Wall Street expects Nvidia’s earnings to rise by 35% annually in the next five years. It suggests Nvidia should end fiscal 2029 with adjusted earnings of US$55 per share. So, if NVDA stock is priced at 35 times its forward earnings, it should trade at US$1,925 at the start of CY 2028, indicating an upside potential of more than 100% from current levels. This gain would propel Nvidia stock to a market cap of over US$4.5 trillion, possibly making it the largest company in the world.
While Nvidia remains a compelling bet, here are two other AI chip stocks you can consider right now.
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The bull case for AMD stock
While Advanced Micro Devices (NASDAQ:AMD) has trailed Nvidia in recent months, it has still returned 72% in the last year and is up close to 4,000% since May 2014. However, the chip stock also trades 27% below all-time highs, allowing you to buy the dip.
Similar to Nvidia, AMD is bullish on data centre segment sales, which rose by 80% to US$2.3 billion. This growth in revenue was attributed to sales of its MI300 AI chips, which are used by giants such as Meta, Oracle, and Microsoft. AMD sold more than $1 billion on these chips in the first quarter (Q1) and expects 2024 sales at US$4 billion just for this product.
Priced at 36 times forward earnings, AMD stock is positioned to grow earnings by 23% annually in the next five years.
The bull case for Taiwan Semiconductor stock
The final chip stock on the list is Taiwan Semiconductor (NYSE:TSM), the largest manufacturer of advanced producers. The company accounts for 61% of global foundry sales, which allows it to benefit from moats such as pricing power. Its net margin stood at 40%, much higher than the industry average of 14%.
During its recent earnings call, company chief executive officer C.C. Wei emphasized, “Almost all the AI innovators are working with TSM to address an insatiable AI-related demand for energy-efficient computing power.” The chip leader now expects AI processor sales to more than double year over year in 2024.
Valued at US$734 billion by market cap, the tech stock has already returned close to 600% in the last decade. Priced at 22.5 times forward earnings, TSM stock is really cheap as earnings are on track to expand by 21.5% annually in the next five years.
