Artificial intelligence (AI) is rapidly shifting from hype to reality. It feels like yesterday that ChatGPT first went viral. That was in early 2023. Just over two years later, research by Statista estimates the AI market will reach $244 billion this year and exceed $1 trillion by 2031.
It’s an exciting time for technology investors, though the artificial intelligence opportunity will evolve as it matures, and AI stocks won’t go up in a straight line.
Look no further than recent weeks. Volatility has shaken the market, and while the major market indexes remain within shouting distance of all-time highs, several high-profile AI stocks, like Nvidia (NASDAQ: NVDA), Taiwan Semiconductor (NYSE: TSM), and ASML Holding (NASDAQ: ASML), have fallen 26% to 38% from their highs.
Here is why each stock should thrive over the next five years (and beyond) and are no-brainer buys right now.
Nvidia has been the biggest winner in AI’s early innings. The company’s GPU chips became the industry standard for training large language models, which can require many thousands of chips housed in data centers. Whether companies are developing smarter AI models or simply trying to keep them running as the world floods them with queries, it seems all roads have led to increased chip demand.
There is an ongoing development curve with AI chips, with a push for more computing power while using less energy. The initial AI investment cycle centered on Nvidia’s Hopper chip microarchitecture, and now its successor, Blackwell, could be even more successful. Nvidia has a product roadmap that could last years as the world races to build AI technology.
Despite Nvidia stock’s 26% decline, analysts continue to raise their revenue estimates for 2025 and 2026 as AI investments remain strong. Today, the stock trades at a PEG ratio of roughly 1.0 using its current price-to-earnings (P/E) ratio and estimated 35% long-term earnings growth rate. That’s a compelling value for an AI leader, and it gives investors a margin of safety if growth slows somewhat from its current trajectory.
Some investors may not realize that Nvidia doesn’t manufacture its chips. Instead, it depends on chip foundries, such as Taiwan Semiconductor, the world leader in this field. Counterpoint Research estimates Taiwan Semiconductor’s global foundry market share at approximately 67%, meaning it’s the biggest and best chip builder by a country mile.
Manufacturing AI chips is serious business. It requires the best equipment and manufacturing methods, production capacity, and efficiency to keep costs as low as possible.
No company checks all those boxes like Taiwan Semiconductor, which is why the company’s market share remains so high. Industry researchers believe the AI chip market could grow by 20% annually through 2029, so Taiwan Semiconductor should directly benefit as the leading manufacturer.
Some may fear Taiwan Semiconductor’s geopolitical exposure to China, but the company has expanded its business to the United States and Europe to help mitigate those risks. The stock is a bargain after its recent 26% slide, with a compelling 0.7 PEG ratio. That should translate to outsized investment returns if the business delivers anywhere close to the 32% annualized long-term earnings growth analysts expect.
Keying in on these dominant role players in the AI chip supply chain could be a winning strategy, and ASML rounds out this list.
The company builds lithography machines for chip foundries. The machines print intricate circuit patterns on silicon wafers. High-end chips, like those used for AI, often use a unique technology called extreme ultraviolet lithography (EUV). ASML is the only company in the world that builds EUV machines.
The quick pitch is the same as with Nvidia and Taiwan Semiconductor: As long as companies need smaller, more powerful, and more efficient AI chips, ASML should thrive. The stock’s recent pullback was pretty sizable, topping 38%.
Why? An overheated valuation is one reason. The stock’s P/E ratio is still 32, even after its tumble. Additionally, ASML’s business with China has fluctuated due to U.S. efforts to restrict exports of high-end AI chips and equipment to China, an essential market.
Still, ASML is looking at a bright future. Analysts estimate the company will grow earnings by an average of 19% annually over the long term. The current PEG ratio (1.7) is the highest of these three stocks, but I often buy high-quality stocks at PEG ratios up to 2.0 to 2.5, so the stock is now attractively priced for its anticipated growth. Investors can confidently buy this dip and feel good about potential returns as the AI industry grows.
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
These 3 Are Great Artificial Intelligence (AI) Stocks to Buy on the Dip Right Now was originally published by The Motley Fool
