The stock market has ridden the thrill for artificial intelligence (AI) to recent heights. It is not all hype; in line with McKinsey, AI could add as much as $13 trillion to the worldwide 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 every.
At this writing, Taiwan Semiconductor stock trades at a forward P/E ratio of just below 28. At the identical time, analysts estimate the corporate’s earnings will grow by a median of 31% annually over the subsequent three to 5 years. That is a PEG ratio of 0.9, indicating the stock is a bargain for its expected future growth.
So, why is the stock so low cost? Taiwan is near China, which claims it is a component of its territory and has threatened to invade the country. This can be a legitimate risk that investors should consider before buying the stock. That said, it’s not possible to know what is going to occur. A forceful invasion might spark retaliation from the U.S. and other countries due to 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 construct recent foundries in Arizona.
Ultimately, Taiwan Semiconductor is just too good an organization to disregard the stock at this valuation, even with the geopolitical noise around it.
Jake Lerch (Tesla): My selection is Tesla.
Granted, most investors know Tesla as an electrical vehicle company, but there’s more under the hood for those willing to look.
In its most up-to-date quarter (the three months ended Sept. 30), Tesla reported total revenue of $25.2 billion. Some $20 billion, or 80% of the entire, got here 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 = yr over yr.
Furthermore, as Tesla’s AI investments begin to bear fruit, AI will likely drive growth for the corporate.
Consider this: One could view Tesla’s vehicles as greater than simply products; they might even 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 info to continually improve what could grow to be the corporate’s crown jewel: its Full Self-Driving (FSD) system.
If Tesla can develop truly autonomous FSD, the corporate’s market cap could expand by a complete order of magnitude — which is astounding considering that Tesla is (as of this writing) valued at greater than $1 trillion.
That is to say nothing of Tesla’s other bets that depend on AI advancements: its Optimus humanoid robot, robotaxis, and maybe unimagined (or no less than unrevealed) uses for its massive supercomputer clusters.
In other words, yes, Tesla is an AI company. What’s more, when all is claimed and done, Tesla’s AI assets are so impressive that they might power the corporate to unexpected heights over the next a long time. AI-oriented investors should take notice.
Will Healy (Qualcomm): Of the key AI chip stocks, few appear higher positioned for buyers than Qualcomm. It had grow to be an afterthought for investors because the 5G upgrade cycle ran its course.
Nonetheless, that modified due to AI, as smartphones equipped with the Snapdragon 8 Gen 3 or the Elite Mobile Platform chipsets delivered on-device AI to smartphone users. Furthermore, Qualcomm has thought ahead to the day when smartphone use would fall. Hence, the corporate expanded into Web of Things/industrial, automotive, and PC chips.
In reality, 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 corporate’s revenue. For now, handsets were 64% of the corporate’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’s in a legal dispute with Arm Holdings, which Qualcomm relies 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 increase the provision agreement.
For now, Qualcomm advantages from an upcycle. In fiscal 2024, the corporate’s $39 billion in revenue increased by 9%. Nonetheless, in Q4, revenue rose by 18%, signaling an upward move within the cycle is benefiting the corporate. 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 face in the way in which of its long-term success.
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See 3 “Double Down” stocks »
*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 Idiot has positions in and recommends Advanced Micro Devices, Apple, Nvidia, Qualcomm, Taiwan Semiconductor Manufacturing, and Tesla. The Motley Idiot has a disclosure policy.
The Artificial Intelligence (AI) Boom Is not Over. 3 AI Stocks to Buy Right Now. was originally published by The Motley Idiot