AI has the potential to become a multi-trillion dollar industry. There are still blue-chip stocks with attractive risk-reward upside potential. Here we will introduce three of them.
Excitement about artificial intelligence (AI) has reached new heights in the stock market. It’s not all hype. According to McKinsey, AI could add up to $13 trillion to the global economy by 2030. Admittedly, some stocks are rising faster than others, so some stocks may be too expensive.
But there are still top AI stocks worth buying today.
Three Fool.com contributors pool their brains and select Taiwan Semiconductor Manufacturing Company (TSM -1.32%), Tesla (TSLA 3.07%), and Qualcomm (QCOM -2.12%) as the best AI stocks to buy right now. did.
The investment pitch for each is as follows:
Geopolitical concerns shouldn’t prevent investors from owning this rockstar AI stock
Justin Pope (Taiwan Semiconductor): If you’re looking for a surefire winner in the AI space, Taiwan Semiconductor is your best bet. The company is the world’s largest semiconductor foundry, producing chips for design companies such as Nvidia and AMD. Taiwan Semiconductor is one of the world’s leading foundries, accounting for an estimated 62% of the global market as of Q2 2024. This puts Taiwan Semiconductor in a position to capture the explosive growth in demand for AI chips in the future.
AMD CEO Lisa Su said at her company’s third-quarter earnings conference that demand for AI chips will grow 60% annually to reach $500 billion in 2028, and that the semiconductor industry will grow in 2023. I predicted that it would exceed the overall scale. , you will need more and more chips.
As of this writing, Taiwan Semiconductor’s stock is trading at a forward P/E ratio of just under 28 times. At the same time, analysts expect the company’s profits to grow by an average of 31% annually over the next three to five years. It has a PEG ratio of 0.9, indicating that the stock is a bargain given its potential for future growth.
So why are stock prices so low? Taiwan is close to China, which claims it is part of its territory and has threatened to invade it. This is a legitimate risk that investors should consider before purchasing stocks. However, it is impossible to know what will happen. Because of Taiwan’s importance in the global chip supply chain, an armed invasion could provoke retaliation from the United States and other countries. U.S. and Taiwanese semiconductors have taken steps to hedge risks from China, including cutting shipments of advanced AI chips to China and investing about $65 billion to build a new foundry in Arizona. are.
At the end of the day, despite all the geopolitical noise around it, Taiwan Semiconductor is too good a company to ignore at this valuation.
Tesla is still (mostly) a car company, but investors shouldn’t overlook its AI investments.
Jake Larch (Tesla): My choice is Tesla.
Sure, most investors know that Tesla is an electric car company, but there’s a lot more under the hood for those interested.
In its most recent quarter (three months ending September 30), Tesla reported total revenue of $25.2 billion. Approximately $20 billion, or 80% of the total, came from auto revenues. The remaining $5.2 billion was split almost evenly between energy generation and storage ($2.4 billion) and services ($2.8 billion). These segments grew significantly faster than Tesla’s automotive division.
Business segment YoY sales growth rate Automotive 2% Power generation/storage 52% Services/others 29%
Data Source: Tesla Q3 2024 Quarterly Update. YOY = change from previous year.
Additionally, once Tesla’s AI investments begin to bear fruit, AI could fuel the company’s growth.
Consider this. You can also look at Tesla cars as more than just a product. They can also be platforms. Teslas are equipped with multiple sensors designed to capture video and data and relay it to Tesla’s Dojo or Cortex supercomputers. These systems analyze data to continually improve the company’s potentially crown jewel Fully Self-Driving (FSD) system.
If Tesla can develop a truly autonomous FSD, its market cap could grow by an order of magnitude. This is surprising considering that Tesla is valued at over $1 trillion (as of this writing).
That’s not to mention Tesla’s other bets that depend on advances in AI. It’s a use for Optimus’ humanoid robot, robotaxis, and perhaps an unimaginable (or at least unrevealed) giant supercomputer cluster.
In other words, yes, Tesla is an AI company. Moreover, as it turns out, Tesla’s AI assets are quite impressive and could propel the company to unexpected heights for decades to come. AI-minded investors should take note.
AI should help this telecom stock better connect with investors
Will Healy (Qualcomm): Among the major AI chip stocks, few appear to be better positioned for buyers than Qualcomm. As the 5G upgrade cycle wraps up, it’s been on the back burner for investors.
But things have changed thanks to AI, as smartphones with Snapdragon 8 Gen 3 or Elite Mobile Platform chipsets now offer on-device AI to smartphone users. Additionally, Qualcomm anticipated a day when smartphone usage would decline. Therefore, the company expanded into Internet of Things/industrial, automotive, and PC chips.
In fact, the company’s automotive division was the fastest growing division in fiscal year 2024 (ending September 29), with revenue increasing 55%. Still, it only accounts for just over 7% of the company’s revenue. Currently, mobile phones account for 64% of the company’s revenue, and the segment’s revenue has grown 10% annually during the AI upgrade cycle.
To be sure, Qualcomm’s mobile phone business faces notable challenges, with Qualcomm in a legal dispute with Arm Holdings, which it relies on for some chip designs. The dispute dates back to 2019, but Qualcomm has continued to thrive despite the legal battle.
Apple has also tried to best Qualcomm’s designs for years, only to end up extending its supply contract.
For now, Qualcomm is reaping the benefits of upcycling. The company’s revenue for fiscal 2024 was $39 billion, an increase of 9%. However, revenue rose 18% in the fourth quarter, showing that the upward movement in the cycle is benefiting the company. Additionally, costs and expenses increased by only 3%, and Qualcomm’s fiscal 2024 net income was $10 billion, a 40% increase from the previous year.
Amid this growth, Qualcomm’s P/E ratio of approximately 18x is well below other chip industry competitors. A dispute with Arm carries some risk, but as Qualcomm diversifies into other areas, it will be harder for such challenges to stand in the way of the company’s long-term success.
