Nvidia (NVDA 4.11%) has been at the forefront of the artificial intelligence (AI) revolution over the past two and a half years. Its graphics processing units (GPUs) are the backbone of every major data center project undertaken by hyperscale cloud customers investing tens of billions of dollars in AI. This has resulted in significant revenue growth and even stronger earnings growth for Nvidia over the last two years, rewarding investors handsomely. Nvidia’s stock price surged 239% in 2023 and another 171% in 2024, briefly catapulting the company to the top of the list of most valuable companies. However, following the recent stock market sell-off, Nvidia shares are now around 25% below their all-time high reached in January.
Two AI Stocks with Long-Term Potential
While Nvidia remains a leader in AI, two other artificial intelligence companies, Meta Platforms and Taiwan Semiconductor Manufacturing, are poised to outperform Nvidia in the long run due to their competitive advantages.
1. Meta Platforms
Meta Platforms (META 2.65%) is potentially the biggest long-term beneficiary of advances in generative AI worldwide. The company is heavily investing in this area, with capital expenditures expected to reach as high as $65 billion this year to support a new data center build-out. Unlike the big three cloud computing platforms, Meta uses its servers exclusively for its own business. The company’s AI advancements have already shown positive results, such as improved engagement and time spent on its apps after applying learnings from large language models to its recommendation system.
Meta is also seeing strong adoption of its AI-powered ad creative tool, Advantage+ Creative, with 4 million advertisers using it. The expansion of generative AI could enable more small businesses to advertise on Meta’s platforms with minimal experience or overhead. CEO Mark Zuckerberg envisions a future where advertisers can simply provide a business objective and budget, and Meta’s AI will handle the rest. This could unlock a new wave of advertisers and improve ad efficacy, leading to higher average ad prices.
Additionally, Meta is developing AI chatbots for WhatsApp and Messenger to handle customer service and sales at scale for businesses. Analysts estimate that the potential value of AI agents on WhatsApp alone could be worth $100 billion. As a software company with high operating leverage, Meta can unlock value for billions of people, potentially driving substantial earnings growth.
Despite its growth potential, Meta’s stock trades at a relatively reasonable 21.2 times forward earnings. As its AI services gain traction and generate more revenue, the company should see significant profit growth.
2. Taiwan Semiconductor Manufacturing
Taiwan Semiconductor Manufacturing (TSM 0.57%), or TSMC, is the chip manufacturer that enables Nvidia’s success. TSMC dominates the semiconductor fabrication industry, accounting for over two-thirds of all spending on semiconductor fabrication, and its market share is growing. The company’s technological lead and scale allow it to manufacture advanced chips at lower costs than its competitors, creating a virtuous cycle that widens the gap between TSMC and its competition.
TSMC’s exceptional capabilities make it the go-to manufacturer for advanced chips, particularly for cloud customers requiring efficient data center operations. While Nvidia’s biggest customers are developing their own custom silicon solutions, TSMC will remain the primary manufacturer of these chips. This positions TSMC for long-term success, with management targeting a gross margin of 53% or higher.
The stock currently trades at 17.4 times forward earnings, near its lowest valuation since the start of the AI boom. With its strong competitive advantages and growth prospects, TSMC is well-positioned to outperform Nvidia in the long run.
