Missed Palantir’s Run-Up? My top artificial intelligence (AI) stock to buy and hold.

On December 26, 2024By Littum

Palantir Technologies (NASDAQ: PLTR) the stock has been on a roll in the market in 2024 and has recorded remarkable gains of 370% at the time of writing. The rapid adoption of artificial intelligence (AI) software solutions by organizations and governments played a central role in this amazing increase.

So if someone bought just $100 of Palantir stock at the end of 2023, their investment would now be worth $470. But if you are one of those who missed out buy Palantir before its 2024 rally began and are skeptical about investing in the stock now due to its expensive valuation, there is a good alternative to consider in the form of Taiwan Semiconductor Manufacturing (NYSE: TSM).

Popularly known as TSMC, shares of this Taiwan-based foundry giant nearly doubled in 2024. The good part is that this semiconductor giant can still be bought at a fair value, and investors may want to do so right away given the pivotal role it plays in the chip industry could also skyrocket by 2025.

Let’s examine the reasons why TSMC is one of the best AI stocks to buy and hold right now.

The proliferation of artificial intelligence is driving robust demand for chips installed in data centers for training and inference purposes, and this has proven to be a boon for TSMC. Fabless chipmakers, such as Nvidia, Advanced micro-devices, Broadcom (NASDAQ: AVGO)and Marvel technologywhich designs graphics processing units (GPUs) and application-specific integrated circuits (ASICs) for use in AI data centers, has used TSMC’s fabrication facility to have its chips manufactured.

This is why the Taiwan-based company saw a big jump in its revenue so far in 2024. In the first 11 months of the year, TSMC’s revenue increased by 32% compared to the previous year. That’s a big improvement over the 9% decline to $69.3 billion that TSMC saw in its top line in 2023. TSMC management expects to register revenue growth of 30% for 2024 in US dollar terms, which will bring its top line to USD 90 billion for the year.

The good thing is that consensus estimates also project healthy growth in the company’s top line over the next few years.

TSM revenue estimates for next fiscal year data of YCharts.

However, recent comments from major AI chipmakers indicate that TSMC may well exceed market expectations going forward. Broadcom, for example, generated $12.2 billion in revenue from sales of AI chips in fiscal 2024, a 220% increase over the previous year. The company believes its usable, addressable market in custom AI processors and networking chips could range between $60 billion and $90 billion by fiscal 2027.

This is higher than what some analysts had expected. Earlier this year, Morgan Stanley pegged Broadcom’s revenue opportunity in custom AI chips at $20 billion to $30 billion, and stated that this market is capable of growing at a compound annual growth rate of 20%. Based on this growth rate, the market for custom AI chips would have grown to $51 billion in three years at the higher end of the forecast range.

So Broadcom management’s recent comments suggest the possibility could be much larger. More importantly, Broadcom is partnering with TSMC and using the latter’s advanced chip packaging capabilities to push the boundaries of the custom AI chip market to bring more powerful processors capable of delivering better performance.

On the other hand, TSMC is likely to continue to benefit from strong demand for GPUs installed in data centers. AMD management pointed out in October 2024 earnings conference call that the size of the AI accelerator market could grow at an annual rate of 60% and hit $500 billion by 2028. Nvidia, on the other hand, sees a $1 trillion revenue opportunity in the data center market thanks to the shift from general-purpose computing to GPU-driven accelerated data processing.

Not surprisingly, TSMC is busy boosting its capacity so it can produce more chips to meet the demand from these customers for AI chips. According to Taiwan-based financial newspaper Commercial Times (via TrendForce ), TSMC is expected to double its advanced chip packaging capacity to 70,000 wafers per month by 2025, followed by a further increase to 90,000 wafers per month in 2026.

The improved capacity should allow TSMC to fulfill more orders from customers discarding AI chips and ultimately maintain robust top- and bottom-line growth.

The red-hot rise in Palantir’s stock has made it quite expensive. More specifically, Palantir has a price-to-earnings ratio of 411 along with a forward earnings multiple of 172. TSMC is far cheaper on both of these fronts. Its trailing earnings multiple stands at 33, while its forward earnings multiple stands at 23.

What’s interesting to note here is that TSMC’s earnings are expected to grow at a stronger pace of 27% to $8.93 per share in 2025 compared to Palantir’s expected bottom line growth of 25% to $0.47 per share. So TSMC is the significantly cheaper AI stock to buy right now compared to Palantir, and buying it looks like a no-brainer, given that the former is expected to see faster bottom-line growth.

Furthermore, TSMC’s dominant position in the foundry market, where it has a solid 64% share – well ahead of second-placed Samsung foundry at 12% – means it is well placed to make the most of the secular growth in AI chips. All of this makes TSMC a top stock to buy, and investors who missed Palantir’s phenomenal rise may want to consider buying the Taiwanese foundry giant before it soars higher following impressive gains in 2024.

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Harsh Chauhan has no position in any of the shares mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, Palantir Technologies and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and Marvell Technology. The Motley Fool has one disclosure policy.

Missed Palantir’s Run-Up? My top artificial intelligence (AI) stock to buy and hold. was originally published by The Motley Fool