Investors Eye Nvidia and TSMC Amid AI Infrastructure Spending
Many investors are closely monitoring large technology firms as they pour substantial capital into artificial intelligence (AI) infrastructure. A pressing question remains: when, or if, these investments will yield significant returns.
Concerns have emerged that announced capital allocation plans may be scaled back or delayed. However, indications show that spending is not only ongoing but also increasing. If this trend holds, two of the key beneficiaries of this spending could be worthwhile stocks to consider now.
Surging Demand for AI Data Centers
A primary beneficiary of this investment trend is Nvidia (NASDAQ: NVDA). The company’s high-performance chips are rapidly populating data center stacks worldwide. The surge in AI development has fundamentally benefited Nvidia and its shareholders. Nevertheless, Nvidia’s stock has faced pressure, primarily due to concerns about demand stemming from a potential slowdown in AI infrastructure investment and regulatory challenges related to export restrictions.
Despite worries about capital expenditures, these concerns might be overstated. Jonathan Gray, the chief operating officer of asset management firm Blackstone, recently stated to CNBC, “I think this trend is powerful. I think it will continue… overall, we still see a ton of demand.” This sentiment is echoed by major Nvidia clients such as Meta Platforms, Microsoft, and Amazon, which indicate intentions to sustain or even expand their capital spending plans.
That said, export restrictions pose a more significant challenge for Nvidia. The management has announced plans to incur $5.5 billion in charges following a decision by the Trump administration to impose limits on exports and require licensing for sales of Nvidia’s H20 AI chip to China—a product modified to comply with previous regulations.
China’s Market Conditions Might Improve
China is a crucial market for Nvidia. Concerns related to this segment have contributed significantly to Nvidia’s stock decline this year, as sales from the region accounted for 13% of total revenue last year, down from 17% the previous fiscal year. This trend indicates that Nvidia does not rely heavily on Chinese customers.
Reports suggest that President Donald Trump may reconsider AI chip export regulations. With a potential rollback of Biden-era restrictions, it remains unclear how future regulations could impact Nvidia’s business, but the effects may already be reflected in its stock price.
In light of this, investing in Nvidia still appears sensible, especially given the stock’s recent pullback. As Nvidia continues to thrive, investors may also want to consider its largest supplier for additional investment opportunities.
A Strong Contender in the AI Landscape
Taiwan Semiconductor (TSMC) (NYSE: TSM) also ranks as a significant player in the AI ecosystem and considers Nvidia one of its major customers. TSMC produces a variety of semiconductor products, including microprocessors and graphics processing units (GPUs). Although reliant on customers like Nvidia, TSMC boasts a diverse client portfolio, having serviced over 500 customers last year.
Demand for TSMC’s services is skyrocketing. In the first quarter, revenue surged by 42%, with net income and diluted earnings per share increasing by 60% year over year. This impressive growth is expected to persist, with management forecasting nearly a 40% year-over-year revenue increase in the current quarter.
However, similar to Nvidia, TSMC shares have fallen by over 10% year-to-date, leading to an attractive valuation. The stock currently trades at a forward price-to-earnings ratio below 20.
Both Nvidia and TSMC have seen declines due to concerns about slowing growth. Yet, customer demand and recent comments from tech companies suggest that the rise in AI development may not represent a bubble. Even if capital expenditures on data center expansions slow, this does not capture the entirety of the AI landscape, which also encompasses software integral to consumer and enterprise devices alike.
Adopting a broad perspective should ease investor concerns about holding both Nvidia and TSMC at these valuations.
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John Mackey, former CEO of Whole Foods Market, a subsidiary of Amazon, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is also a board member. Howard Smith holds positions in Amazon, Microsoft, and Nvidia. The Motley Fool holds and recommends positions in Amazon, Blackstone, Meta Platforms, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing, and has disclosed options on Microsoft.
The views expressed here are the opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
