Many investors are closely observing large technology companies as they allocate substantial capital towards artificial intelligence (AI) infrastructure. The primary question remains whether these investments will yield sufficient returns.
Concerns exist that the previously announced capital allocations might be reduced or delayed. However, indications suggest that spending is not only continuing but may be accelerating. If this trend persists, two major beneficiaries could be considered top investment choices at present.
Currently, Nvidia is a key recipient of this capital flow. Its advanced chips are being integrated into server stacks in numerous globally constructed data centers. This AI boom has significantly benefited Nvidia and its investors, despite pressure on the stock due to potential slowdowns in AI infrastructure spending and regulatory challenges such as export restrictions.
Concerns surrounding capital expenditure might be overestimated. Jonathan Gray, COO of Blackstone, expressed optimism on CNBC, stating a belief in the strength of the trend and ongoing demand. This supports assertions from major Nvidia clients like Meta Platforms, Microsoft, and Amazon regarding their continued or growing capital expenditure plans.
Export restrictions pose more substantial challenges for Nvidia. Following limits set by the Trump administration on exports, Nvidia plans to incur $5.5 billion in charges. These restrictions impact sales of the H20 AI chip to China, a modified product designed to comply with existing regulations.
China remains a crucial market for Nvidia. Regulatory constraints have contributed to the decline in Nvidia’s shares this year, with sales in China accounting for 13% of total revenue last year, a decrease from 17% in the previous fiscal year, indicating Nvidia’s limited dependence on Chinese customers.
Recent reports suggest potential changes in AI chip export policies under President Trump, possibly overturning Biden-era restrictions. However, the future of these regulations is uncertain, and their impact might already be reflected in Nvidia’s stock price.
Despite these challenges, investing in Nvidia continues to appear viable, particularly as the stock has experienced a pullback this year. As Nvidia’s business thrives, looking at its major supplier, Taiwan Semiconductor (TSMC), could also present a rewarding investment opportunity.
Taiwan Semiconductor counts Nvidia among its significant customers and provides a range of semiconductor products. Despite supplying more than 500 customers last year, demand for TSMC’s services is growing rapidly, with revenue increasing by 42% and profits even outpacing this growth. Net income and diluted EPS soared 60% year-over-year, and the company anticipates a nearly 40% revenue increase in the current quarter.
Like Nvidia, TSMC’s shares have declined by over 10% this year, resulting in an attractive valuation with a forward price-to-earnings ratio below 20.
Both Nvidia and TSMC stocks have been affected by concerns over slowing growth. However, based on customer demand and recent comments from tech companies, AI development has not reached a speculative bubble stage. Even with potential slowdowns in data center capital spending, AI’s integration extends beyond hardware, encompassing software likely to be utilized across consumer and enterprise devices.
This broader perspective should reassure investors considering holding Nvidia and TSMC stocks at their recent valuations.
