Many investors are noticing substantial investments being made by big tech companies in artificial intelligence (AI) infrastructure. The pressing question, however, is when—or if—these investments will yield reasonable returns.
There are worries that the significant capital allocations mentioned might be reduced or delayed. Yet, signs suggest that spending is not just ongoing, but possibly gaining momentum. If this trend holds, two of the major beneficiaries of this expenditure could be solid stock options to consider now.
AI Data Center Demand for “Tons”
One of the prominent recipients of this capital is Nvidia (NVDA). Its advanced chips are found in many server stacks across data centers being constructed around the world. Consequently, the AI surge has proven to be a transformative profit source for Nvidia and its shareholders. Still, stock prices face pressure as doubts arise regarding demand due to decreasing AI infrastructure spending and regulatory challenges like export restrictions.
Some concerns about capital expenditures may be overstated. Jonathan Grey, Chief Operating Officer at Blackstone, recently expressed on CNBC, “I think this trend is strong. I think it will continue… Overall, we still see a lot of demand.” This is promising for Nvidia’s investors, as key clients such as Meta Platforms, Microsoft, and Amazon indicate intentions to maintain or expand their spending plans.
For Nvidia, these export limitations could pose more significant challenges. Management has mentioned that Nvidia could face a $5.5 billion bill following export restrictions set by the Trump administration requiring a license for sales of NVIDIA’s H20 AI chip to China. This chip was specifically modified to comply with prior regulations on exports to China.
China’s Importance May Be Adjusting
China represents a crucial market for Nvidia. The existing concerns about this market have been a major factor contributing to the decline of NVIDIA’s stock this year. Sales in China accounted for 13% of total revenue last year, a drop from 17% in the prior year, indicating Nvidia is not overly reliant on Chinese sales.
Recent reports suggest that President Trump might consider easing restrictions on AI chip exports. He is reportedly looking to roll back these constraints just as new Biden-era regulations are set to take effect. While future rules remain uncertain, the potential impact on Nvidia’s business may already be reflected in its stock price.
Investing in AI leaders still seems sensible, especially given that stocks have taken a hit this year. With Nvidia’s business continuing to perform well, investors can look to these key suppliers for current opportunities.
Another Global AI Player
Taiwan Semiconductor Manufacturing Company (TSMC) is also recognized as a critical partner for Nvidia. TSMC delivers semiconductor products like microprocessors, graphics processing units (GPUs), and various advanced tech packages. Nvidia is one of TSMC’s many large tech clients, and TSMC has an expansive customer base with over 500 clients last year.
Demand for TSMC’s services is climbing sharply. Revenue increased by 42% in the first quarter, and profit surged even more, with net income and diluted earnings per share climbing by 60% year-over-year. The company expects this rapid growth to persist, forecasting nearly 40% year-on-year growth in the upcoming quarter.
Just like Nvidia, TSMC’s stock has also seen a decline of more than 10% this year, leading to an attractive valuation. Currently, the stock is trading at a price-to-earnings ratio of less than 20.
Both Nvidia and TSMC have been affected by worries about slowing growth. However, based on current customer demand and insights from various tech firms, it seems that the rise in AI development won’t simply fizzle out. Even if investments in data center construction slow down, that doesn’t paint the full picture. AI encompasses software that could run on nearly any device, benefiting both consumers and businesses alike.
Taking this broader perspective, many investors might find it quite reasonable to hold shares in both Nvidia and TSMC, given their current assessments.
