Why TSMC and Arm Holdings are two top investment choices.
Technology continues to shape the world we live in — so perhaps, not surprisingly, the tech sector remains one the best places to invest. And when a tech company can provide services that are high in demand, this puts it in a special category all its own.
Let’s look today at two such tech stocks to invest $1,000 in right now — two companies that are go-to players in the complex process of chipmaking.
Taiwan Semiconductor
As the largest semiconductor contract manufacturer in the world, Taiwan Semiconductor Manufacturing (TSM -1.21%), or TSMC for short, is essentially the go-to company in the artificial intelligence (AI) infrastructure buildout. Whether Nvidia continues to hold its massive lead in AI chips with its graphic processing units (GPUs), or Advanced Micro Devices makes inroads, or companies begin to turn to custom chips from Broadcom, TSMC wins regardless.
As long as more and more chips are needed, whether for AI data centers or smartphones, TSMC benefits. On that front, capital expenditures (capex) related to AI just continue to increase.
For example, the top four hyperscale companies in the U.S. increased their capex budgets from $145 billion in 2023 to $202 billion in 2024, much of that directed toward AI. And that spending is only expected to increase as the large language models (LLMs) models needed for AI training advance, needing exponentially more computing power and GPUs.
So far, the demand for TSMC’s services are showing up in its results, with second-quarter revenue rising 33% in U.S. dollars and 40% in New Taiwan dollars. The strong revenue growth has continued in the current quarter, with 45% revenue growth in July and 33% in August in local currency.
Image source: Getty Images.
With demand for its services so high, TSMC is in a strong position and will benefit not only from increased production, but also increased prices for its services, which it plans to raise next year. There are already reports that the company is set to raise prices next year by 10% for AI semiconductors and chip-on-wafer-on-substrate products, by 6% for high-performance computing, and by 3% for smartphones, according to Morgan Stanley.
Trading at a forward price-to-earnings (P/E) of 20 times next year’s analyst estimates, the stock is attractively valued given the growth in front of the company.
TSM PE Ratio (Forward 1y) data by YCharts
Arm Holdings
Another chip-related company to buy right now is Arm Holdings (ARM -1.20%). It has one of the most attractive models in the chip space, licensing its intellectual property (IP) to other semiconductor companies for them to use in the design of their chips. It also has moved some customers to a subscription service to give them broader access to its architecture.
The company is a leader in central processing units (CPUs), which act as the brain for devices when they perform functions, and its technology is found in virtually every smartphone around the globe. As such, it will benefit from any increase in smartphone unit sales, which could be spurred by an AI hardware upgrade cycle.
In addition, the company is set to greatly benefit when chips are designed using its newest V9 architecture, which carries nearly double the royalty rate as its V8 architecture. The new A18 chip found in the Apple iPhone 16 is based on its V9 architecture, while iPhone 15 model chips were based on V8 architecture. As such, Arm should benefit from any increase in iPhone 16 sales compared to the prior-year model, as well as much higher royalty rates.
Arm is taking aim at other markets outside of smartphones as well. The company has been benefiting from the AI data center buildout, as Nvidia is making so-called superchips that combine its GPUs with Arm-based CPUs. There is also talk that the company will set up an AI chip division next year to help its majority owner SoftBank, which owns 90% of the company, build out its data center operations using its chips.
On top of that, the company has put the personal computer (PC) market in its crosshairs. Chips based on its technology are now being used to power AI-enabled laptops, and the company is looking to take a 50% or more market share in new Windows-based PCs in the next five years. It already has 100% of the Mac computer market.
ARM PE Ratio (Forward 1y) data by YCharts
Trading at over 66 times next year’s analyst estimates, Arm’s stock is not cheap. However, the company has one of the best business models in the chip space, with a long tail of high-margin revenue based on its design wins. In fact, at the time of its IPO in 2023, the company noted that nearly half its royalty revenue came from Arm products released between 1990 and 2012. That’s very valuable.
Given the recent pullback in the stock, now is a good time to scoop up shares.
Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
