Sarah Travers
As technology continues to shape and transform the world, the tech sector remains one of the most promising places for investors. With high demand for cutting-edge innovations, particularly in the semiconductor industry, certain companies stand out as go-to options for those looking to invest. Two such companies—Taiwan Semiconductor Manufacturing Company (TSMC) and Arm Holdings—are leading players in chipmaking and offer significant growth potential for investors looking to allocate $1,000.
Taiwan Semiconductor Manufacturing Company (TSMC)
TSMC is the world’s largest semiconductor contract manufacturer, playing a critical role in the artificial intelligence (AI) infrastructure buildout. The company’s services are indispensable, regardless of which company holds the lead in AI chip production, be it Nvidia, Advanced Micro Devices (AMD), or Broadcom. This makes TSMC a crucial player in the AI revolution, benefiting from a growing need for more powerful chips in both AI data centers and consumer electronics like smartphones.
The AI boom is driving unprecedented capital expenditures, particularly among hyperscale companies in the U.S., which have increased their capital budgets from $145 billion in 2023 to $202 billion in 2024. Much of this spending is directed toward AI-related hardware, positioning TSMC to thrive as demand for its services continues to soar.
TSMC’s financial results reflect this robust demand. The company saw a 33% revenue increase in U.S. dollars during the second quarter of 2024, with revenue growth continuing into the current quarter at 45% in July and 33% in August, measured in local currency. This upward trend is expected to continue as the company gears up for increased production and higher prices for its services in 2024.
In fact, TSMC has announced plans to raise prices by 10% for AI semiconductors, 6% for high-performance computing chips, and 3% for smartphones next year. Despite these price hikes, the company remains attractively valued, trading at 20 times next year’s price-to-earnings ratio based on analyst estimates. For investors looking to capitalize on the AI chip industry’s explosive growth, TSMC offers both stability and significant upside potential.
Arm Holdings
Arm Holdings is another attractive investment opportunity in the semiconductor space. The company specializes in licensing its intellectual property (IP) to other semiconductor companies, which then use its designs in their own chips. Arm’s innovative model includes a subscription service that gives clients broader access to its architecture, making it a critical player in the chipmaking process.
Arm’s central processing unit (CPU) technology is found in nearly every smartphone worldwide, positioning the company to benefit from any surge in smartphone sales, particularly as AI-related hardware upgrades become more common. The upcoming release of the iPhone 16, which utilizes Arm’s latest V9 architecture, is expected to further boost the company’s earnings, as this architecture carries nearly double the royalty rate compared to its predecessor, V8.
Beyond smartphones, Arm is expanding its reach into new markets. It has become a key player in AI data centers, with companies like Nvidia using Arm-based CPUs in their AI superchips. There is also speculation that Arm may establish its own AI chip division next year to help its majority owner, SoftBank, expand data center operations using Arm-designed chips.
Additionally, Arm is targeting the personal computer (PC) market. The company is already a dominant force in Mac computers and is now aiming to capture over 50% of the Windows-based PC market within the next five years. Its chips are powering a new generation of AI-enabled laptops, which will further enhance its market share and revenue potential.
Despite its higher valuation—Arm is trading at over 66 times next year’s earnings estimates—the company’s strong business model and long-term revenue potential make it a compelling investment. A large portion of its royalties still comes from designs released as far back as 1990, providing a steady stream of high-margin revenue. The recent pullback in Arm’s stock price presents a favorable opportunity for investors to buy in at a more reasonable level.
Why TSMC and Arm Are Solid Choices for Long-Term Investment
Both TSMC and Arm Holdings are poised to thrive in the evolving tech landscape. While TSMC benefits from its dominant position in AI chip manufacturing and growing demand for its services, Arm offers an innovative business model with diverse revenue streams, from smartphones to data centers and PCs. Investors looking to allocate $1,000 should consider these two companies as top contenders in the tech sector.
