It’s no secret by now that artificial intelligence (AI) has the stock market’s attention. All three major indexes recently touched all-time highs, confirming that a new bull market is underway, and artificial intelligence is a big reason.
The launch of ChatGPT in late 2022 was the clearest indication yet that the next era of technology is underway and generative AI has major tech companies and others pouring billions of dollars into AI infrastructure.
Initially, Nvidia has been a big winner as demand for its graphics processing units (GPUs) has surged, and other AI hardware stocks have soared. However, there will be more winners from advancing technology. Read on to see two that will become trillion dollar companies in the coming years thanks to AI.
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1. Taiwan Semiconductor Manufacturing
Nvidia AI may look like pick-and-shovel play to the boom, but if you take that line of thinking a step further, the industry sees a high level of pick-and-shovel play. Taiwan Semiconductor Manufacturing (TSM 0.78%).
TSMC, as it is also known, is the world’s largest contract chip manufacturer with about 55% market share of the third-party chip fabrication market and about 90% of advanced chip manufacturing. This typically involves the type of semiconductors and complex components involved in generative AI. Given the strength of this market, it is no exaggeration to say that the company plays a significant role in the development of generative AI and the broader semiconductor industry.
Its biggest customers include the likes of appleNvidia, BroadcomAnd Advanced Micro Devices. These companies have emerged as, or aspire to become, power players in generative AI.
TSMC’s advantage over other foundries in advanced chip manufacturing and its relationships with these top chip designers should help drive its growth in the AI era. It should also allow the company to capitalize on growing demand for chips, as AI plays a bigger role in technology and the economy.
TSMC has wide operating margins that are better than 40%, indicating a competitive advantage, and the company has a current market cap of $709 billion. Given that value and its growth, it could reach $1 trillion within a year or two.
2. Broadcom
Broadcom (AVGO 0.41%) There is another AI stock that looks poised to cross the $1 trillion mark in the coming years, as it is currently valued at $573 billion. It is also seeing AI-driven growth accelerating.
The company is known as a chip designer, but its business is far-reaching as it has grown through several acquisitions throughout its history. Most recently, it acquired virtualization software specialist VMWare, which will give Broadcom a significant bump in revenue and profits this year. It also owns cybersecurity firm Symantec, and enterprise software and DevOps company CA Technologies.
Broadcom has a history of acquiring companies, cutting costs, and absorbing them into its larger business to increase revenue and profitability.
Although Broadcom does not compete in GPUs, it is known for its switches, accelerators, and networking solutions, which are expected to see increased demand in the AI era. Management called for strong demand for networking products in AI data centers as well as custom accelerators in its recent earnings report.
It also noted that AI revenue quadrupled to $2.3 billion in the quarter and raised its forecast for AI-related revenue. Broadcom said it will now represent about 35 percent of semiconductor revenue, or more than $10 billion, up from its prior guidance of 25 percent of revenue.
Like TSMC, Broadcom has wide operating margins with earnings before interest, taxes, depreciation, and amortization (EBITDA) margins expected to be 60% this year, a sign of competitive strength.
With multiple ways to capitalize on the AI boom, Broadcom looks well-positioned to be a winner. A 70% increase in market cap over the next few years is certainly within reach for the diversified chip giant, which would make it worth $1 trillion.
Jeremy Bowman holds positions at Broadcom. 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.