Should You Forget AMD and Buy 2 Tech Stocks Instead?

AMD was once a hot chipmaker, but it lost nearly 40% of its value over the past 12 months. It lost its momentum as its sluggish sales of gaming chips partly offset its stronger sales of PC and data center chips, and investors started to question the long-term growth potential of its closely watched artificial intelligence (AI) accelerators.

AMD’s data center revenue still surged 69% year over year in the fourth quarter of 2024, but that marked a significant slowdown from its 122% growth in the third quarter and 80% growth in the second quarter. That deceleration dampened the bullish hopes that AMD would loosen Nvidia‘s iron grip on the AI market with its cheaper AI accelerators. In the PC market, AMD’s share of the discrete GPU market also shrank against Nvidia’s.

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For 2025, analysts still expect AMD’s revenue and adjusted earnings per share (EPS) to grow 24% and 43%, respectively. Those seem like robust growth rates for a stock that trades at just 23 times forward earnings. However, those estimates might drift lower if its data center business continues to cool off and it falls further behind Nvidia in the gaming market.

AMD isn’t doomed yet, but investors might consider investing in more balanced and diversified chipmakers that don’t directly compete against Nvidia. Two of those stocks are Broadcom (AVGO 0.56%) and Taiwan Semiconductor Manufacturing (TSM -1.13%).

1. Broadcom

Broadcom operates two main businesses: its chipmaking division, which sells a wide range of chips for the mobile, data center, networking, wireless, and storage markets, and its infrastructure software division, which provides enterprise software, security services, and cloud-based services. It significantly expanded both businesses through some big acquisitions (including Vmware in 2023) over the past decade.

Broadcom’s chip and software sales are cyclical, but the growth of the AI market is driving more data centers to ramp up their purchases of its networking chips and custom XPU accelerators. In fiscal 2024 (which ended last November), Broadcom’s sales of AI-oriented chips surged 220% to $12.2 billion and accounted for 41% of its semiconductor revenue.

The rapid expansion of that business, along with the stronger growth of its non-AI chip and software businesses in a warmer macro environment, should drive Broadcom’s revenue and profits higher over the next few years.

From fiscal 2024 to fiscal 2027, analysts expect Broadcom’s revenue to grow at a compound annual growth rate (CAGR) of 17% as its EPS rises at a CAGR of 75%. Its stock might seem pricier than AMD’s at 43 times next year’s earnings, but its broader diversification and more balanced growth justify that higher valuation.

2.Taiwan Semiconductor Manufacturing

Taiwan Semiconductor Manufacturing, also known as TSMC, is the world’s largest and most technologically advanced contract chipmaker. All of the world’s leading fabless chipmakers, including AMD and Nvidia, outsource the production of their smallest, densest, and most power-efficient chips to TSMC’s fabs.

Nvidia’s soaring sales of AI GPUs have been driving the growth of TSMC’s high-performance computing (HPC) market. In 2024, its HPC revenue surged 58% and accounted for 51% of its top line. Its smartphone chip revenue, which accounted for another 35% of its top line, also rose 23% for the year as new handset sales warmed up again.

This year, TSMC aims to widen its lead against its two closest competitors, Intel (NASDAQ: INTC) and Samsung, by ramping up its production of its smallest 2 nm chips. It also continues to expand its overseas plants in the U.S., Germany, and Japan to offset the geopolitical risks for its most advanced foundries in Taiwan.

From 2024 to 2026, analysts expect TSMC’s revenue and EPS to grow at a CAGR of 23% and 26%, respectively, as its core markets expand again. Its stock still looks cheap at 19 times forward earnings, but that’s probably because its valuations are being squeezed by some near-term concerns regarding the tighter export curbs for AI chips, higher tariffs, and the escalating tensions between Taiwan and China. If those headwinds wane, it should command a higher valuation and rally even higher.

Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Intel, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and recommends the following options: short February 2025 $27 calls on Intel. The Motley Fool has a disclosure policy.