Market Reaction to DeepSeek AI’s Breakthrough Highlights Semiconductor Stocks

In January, DeepSeek AI in China caused a significant sell-off in artificial intelligence (AI) stocks by announcing its advancements in efficient training and inference algorithms for large language models. Essentially, the breakthrough suggested that major tech companies might not need to invest heavily in the most advanced GPUs for their data centers.

The situation intensified when Nvidia (NASDAQ: NVDA) released its earnings while President Donald Trump imposed new tariffs on China, Mexico, and Canada. Although Nvidia reported earnings that surpassed analysts’ expectations, investors remained concerned about the impact of DeepSeek’s developments and the precarious economic landscape on Nvidia’s growth trajectory.

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In conjunction with Nvidia’s decline, many semiconductor stocks have felt the pressure. However, a few of these stocks appear attractive at current lower prices. Here are the top two semiconductor stocks to consider buying now.

Image source: Getty Images.

1. Taiwan Semiconductor Manufacturing

Taiwan Semiconductor Manufacturing (NYSE: TSM), or TSMC, stands as the largest chip manufacturer globally. When Nvidia requires production of its cutting-edge GPUs, it partners with TSMC, noted by Nvidia CEO Jensen Huang as “the world’s best by an incredible margin.”

TSMC’s technological edge is substantial. It attracts top-tier clients such as Nvidia and Apple, capturing over 60% of semiconductor fabrication spending—a figure that is on the rise due to increased demand for advanced AI chips that only TSMC can manufacture. This large revenue base allows TSMC to allocate more resources to research and development, thereby maintaining its industry-leading position.

In January, TSMC announced a significant increase in capital investments, projecting $38 billion to $42 billion for 2025, marking a 34% increase from 2024 at the midpoint. The management is adept at anticipating market demand and appropriately strategizing investments. However, semiconductor manufacturing can be cyclical. A substantial drop in demand could still burden TSMC with considerable overhead costs.

Additionally, TSMC revealed plans to invest $100 billion in the United States, including expansion of its facilities in Arizona, the first of which is set to begin high-volume production in late 2024. The cutting-edge technology at these new sites may help mitigate the impact of tariffs on TSMC’s operations and those of its clients.

Following the recent sell-off, TSMC shares trade at less than 20 times earnings, presenting a favorable valuation for a company with a robust competitive advantage poised to benefit from solid demand growth in semiconductor chips.

2. Advanced Micro Devices

Advanced Micro Devices (NASDAQ: AMD) ranks second in the market for valuable GPUs related to AI training, with Nvidia commanding the bulk of spending in this area. Indeed, AMD might have witnessed a decline in market share over the past year due to Nvidia’s faster growth in data center revenue.

AMD also faced investor disappointment with its current quarter outlook, projecting a 7% sequential decline in sales. During an earnings call, CEO Lisa Su noted that this reduction correlates with a similar drop in the data center business, contrasting Nvidia’s forecast of a 10% sequential revenue increase in its data center segment.

Nevertheless, AMD’s potential remains high. The company anticipates that the total addressable market for AI accelerator chips will grow to $500 billion by 2028. Securing just 10% of this market could double its data center revenue from the previous year.

As tech companies seek to moderate Nvidia’s pricing and optimize performance through cost-effective chips, AMD’s established relationships in the sector could enhance its position in the x86 CPU server market—an area where AMD has been steadily gaining market share.

Crucially, AMD is currently valued at only 21 times earnings. Despite a softer earnings outlook, the severity of the stock price drop creates a valuable buying opportunity. Analysts forecast an average earnings growth of 38% over the next two years, aligning well with the current price.

Is Investing $1,000 in Taiwan Semiconductor Manufacturing Worth It?

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Adam Levy holds positions in Apple and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.

The views and opinions expressed herein reflect those of the author and do not necessarily represent the views of Nasdaq, Inc.