In January, the emergence of China’s DeepSeek AI sent ripples through the artificial intelligence (AI) sector, triggering a sell-off in AI-focused stocks. Breakthroughs by DeepSeek in developing highly efficient training and inference algorithms for large language models raised concerns among investors. This technology suggested that major tech companies might not need to spend vast sums—potentially hundreds of billions of dollars—on the most advanced GPUs for their data centers. The sell-off intensified recently following Nvidia’s (NVDA 5.27%) earnings report and the imposition of new tariffs on China, as well as additional tariffs on Mexico and Canada, by President Donald Trump.
While Nvidia’s earnings exceeded analysts’ expectations, investors remained anxious about the impact of DeepSeek’s advancements and the uncertain economic climate on Nvidia’s rapid growth. A number of other semiconductor stocks have experienced price declines alongside Nvidia. Amidst this volatility, two stocks stand out as particularly attractive investment opportunities at these lower prices. Here are my top picks for semiconductor stocks to buy now:
1. Taiwan Semiconductor Manufacturing (TSMC)
Taiwan Semiconductor Manufacturing (TSMC) (TSM 1.46%), the world’s largest chip manufacturer, is a key player in the semiconductor industry. When Nvidia requires its latest GPUs to be manufactured and packaged, it contracts with TSMC. As Nvidia CEO Jensen Huang stated, “It’s the world’s best by an incredible margin.” TSMC’s technological lead is a considerable advantage, attracting significant customers like Nvidia and Apple. The company currently holds over 60% of the spending on semiconductor fabrication, a percentage that continues to grow as businesses demand more high-end AI chips, which TSMC is uniquely positioned to produce.
With a substantial revenue base, TSMC is able to invest considerably more in research and development than its competitors, ensuring it maintains and expands its technological advantage. Moreover, TSMC is adept at anticipating market growth and making strategic investments accordingly. In January, the company revealed plans to significantly increase capital investments for 2025, projecting $38 billion to $42 billion in spending for the year, marking a 34% increase from 2024 at the midpoint. Management has a strong track record of accurately forecasting demand and allocating resources appropriately.
However, the semiconductor manufacturing sector inherently operates in cycles. During periods of decreased demand, TSMC still faces the overhead costs of maintaining its manufacturing facilities. The company recently announced plans to invest $100 billion in the United States, complementing its ongoing expansion of facilities in Arizona, where the first high-volume production phase was initiated in late 2024. These new facilities will incorporate TSMC’s most advanced technologies.
TSMC’s investment strategies may help it mitigate the effects of targeted tariffs affecting its business operations and those of its clients. Following the recent sell-off, TSMC shares are valued at less than 20 times earnings. This valuation represents a compelling opportunity for a company with TSMC’s competitive advantages, especially considering the expected strong growth in chip demand, driven by both AI and other computing requirements.
2. Advanced Micro Devices (AMD)
Advanced Micro Devices (AMD) (AMD 2.92%) is a distant second contender in developing high-value GPUs for AI training. Currently, the majority of big tech investments are directed towards Nvidia for its general-purpose chips. There are arguments that AMD potentially lost market share during the past year. Nvidia’s data center revenue expanded much faster than AMD, despite operating from a larger base.
AMD also disappointed investors with its outlook for the current quarter, anticipating a 7% sequential drop in sales. When asked about the specifics of this decline during the earnings call, CEO Lisa Su indicated that the data center business would see a similar decrease. In comparison, Nvidia projected a 10% sequential increase in revenue for its data center business.
Nevertheless, AMD’s potential remains significant. Management forecasts the total addressable market for AI accelerator chips to reach $500 billion by 2028. Even capturing 10% of this market would roughly double its data center revenue from 2024. AMD could benefit from big tech companies looking to control Nvidia’s pricing or to optimize their spending for performance by utilizing lower-cost chips.
Furthermore, its growing collaborations with tech companies could enhance its share of x86 CPU servers, where it has steadily gained market share in the past few years. Importantly, AMD is trading at just 21 times earnings expectations after the semiconductor stock sell-off. While future earnings expectations have decreased since the most recent financial report, the stock’s price drop is substantial enough to make shares attractive at this point. Even after adjustments, analysts project an average earnings growth of 38% over the next two years. Achieving this level of growth at the current price offers an excellent investment opportunity.
