Palantir Technologies (NASDAQ: PLTR) stock has been on a tearing run on the market in 2024, logging remarkable gains of 370% as of this writing. The rapid uptake of artificial intelligence (AI) software solutions by organizations and governments played a central role in this terrific surge.
So, if someone bought just $100 worth of Palantir stock at the end of 2023, their investment would now be worth $470. However, if you’re one of those who missed buying Palantir before its 2024 surge began and are skeptical of investing in the stock now because of its expensive valuation, there is a nice alternative to consider in the form of Taiwan Semiconductor Manufacturing (NYSE: TSM).
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Popularly known as TSMC, shares of this Taiwan-based foundry giant nearly doubled in 2024. The good part is that this semiconductor giant can still be bought at a reasonable valuation, and investors may want to do that right away, as the crucial role it plays in the chip industry could send it soaring in 2025 as well.
Let’s examine the reasons TSMC is one of the best AI stocks you can buy and hold right now.
The proliferation of AI is driving robust demand for chips deployed in data centers for training and inference purposes, and this has turned out to be a boon for TSMC. Fabless chipmakers, such as Nvidia, Advanced Micro Devices, Broadcom (NASDAQ: AVGO), and Marvell Technology, that are designing graphics processing units (GPUs) and application-specific integrated circuits (ASICs) for use in AI data centers, have been using TSMC’s fabrication plants to get their chips manufactured.
This is why the Taiwan-based company witnessed a big jump in its revenue so far in 2024. In the first 11 months of the year, TSMC’s revenue increased by 32% from the prior year. That’s a big improvement over the 9% drop to $69.3 billion TSMC witnessed in its top line in 2023. TSMC management expects to record 30% revenue growth for 2024 in U.S. dollar terms, which would bring its top line to $90 billion for the year.
The good part is that consensus estimates are also projecting healthy growth in the company’s top line for the next couple of years.
TSM Revenue Estimates for Next Fiscal Year data by YCharts.
However, recent comments from major AI chipmakers indicate that TSMC could very well exceed the market’s expectations going forward. Broadcom, for instance, generated $12.2 billion in revenue from sales of AI chips in fiscal 2024, up 220% from the preceding year. The company believes its serviceable addressable market in custom AI processors and networking chips could range between $60 billion and $90 billion by fiscal 2027.
That’s higher than what certain analysts were expecting. Earlier this year, Morgan Stanley pegged Broadcom’s revenue opportunity in custom AI chips at $20 billion to $30 billion, stating that this market is capable of growing at a 20% compound annual growth rate. Based on that growth rate, the custom AI chip market would have grown to $51 billion in three years at the higher end of the forecast range.
So, Broadcom management’s latest comments suggest that the opportunity could be much larger. More importantly, Broadcom is working with TSMC and using the latter’s advanced chip packaging capability to push the envelope in the custom AI chip market to bring more powerful processors capable of delivering better performance.
On the other hand, TSMC will likely keep benefiting from the strong demand for GPUs deployed in data centers. AMD management pointed out on the October 2024 earnings conference call that the size of the AI accelerator market could grow at an annual rate of 60% and hit $500 billion in 2028. Nvidia, on the other hand, is seeing a $1 trillion revenue opportunity in the data center market thanks to the shift from general-purpose computing to GPU-powered accelerated computing.
Unsurprisingly, TSMC is busy boosting its capacity so that it can churn out more chips to meet the demand from these customers for AI chips. According to Taiwan-based financial newspaper Commercial Times (via TrendForce), TSMC is expected to double its advanced chip packaging capacity to 70,000 wafers per month in 2025, followed by a further increment to 90,000 wafers per month in 2026.
The improved capacity should allow TSMC to fulfill more orders from customers that are churning out AI chips and eventually maintain robust growth in its top and bottom lines.
The red-hot surge in Palantir’s stock has made it quite expensive. More specifically, Palantir has a price-to-earnings ratio of 411, along with a forward earnings multiple of 172. TSMC is far cheaper on both of these fronts. Its trailing earnings multiple stands at 33, while the forward earnings multiple is at 23.
The interesting thing to note here is that TSMC’s earnings are expected to grow at a stronger pace of 27% to $8.93 per share in 2025 compared to Palantir’s projected bottom-line growth of 25% to $0.47 per share. So, TSMC is the significantly cheaper AI stock to buy right now compared to Palantir, and buying it looks like a no-brainer, considering the former is expected to see faster bottom-line growth.
Moreover, TSMC’s dominant position in the foundry market, where it enjoys a solid share of 64% — way ahead of second-place Samsung foundry’s 12% — means it is well placed to make the most of the secular growth in AI chips. All this makes TSMC a top stock to buy, and investors who missed out on Palantir’s phenomenal surge can consider buying the Taiwanese foundry giant before it flies higher following impressive gains in 2024.
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*Stock Advisor returns as of December 23, 2024
Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, Palantir Technologies, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and Marvell Technology. The Motley Fool has a disclosure policy.
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