The last two years have been absolutely phenomenal for technology stocks, as evidenced by the 90% gains recorded by the Nasdaq-100 Technology Sector index during this period, and artificial intelligence (AI) is one of the main reasons for this exceptional increase.

After all, AI has created significant demand for hardware such as semiconductors and server components, while also creating the need for software that can be deployed in real-world situations to help users increase productivity and improve efficiency. Specifically, demand for AI hardware is expected to grow at an annual rate of 31% through 2035, generating $624 billion in annual revenue.

Meanwhile, the AI ​​software market is expected to witness a compound annual growth rate of nearly 34% over the next five years. This is why we will take a closer look at the AI-related prospects of Semiconductor manufacturing in Taiwan (NYSE:TSM)popularly known as TSMC, and Twilio (NYSE:TWLO)two companies that can help investors take advantage of the growing demand for AI hardware and software.

1. Semiconductor Manufacturing in Taiwan

Semiconductors play a critical role in the proliferation of AI, with AI models trained using chips such as graphics processing units (GPUs), central processing units (CPUs), and application-specific integrated circuits (ASICs). This is why people like Nvidia, Advanced microdevices, BroadcomAnd Marvell Technology are experiencing strong demand for their chips.

The common link between these companies is TSMC. The semiconductor companies mentioned above are fabless in nature, meaning they simply design their chips while the manufacturing is outsourced to a foundry such as TSMC. As a result, TSMC has reported a tremendous acceleration in its growth this year.

The Taiwan-based foundry giant’s revenue in the first nine months of 2024 increased 32% year-on-year. For the full year, TSMC management expects revenue to increase by almost 30%. This would translate into revenue of $90 billion, based on the company’s revenue of $69.3 billion in 2023. It is worth noting that TSMC’s revenue has declined by nearly 9% last year as the company faced challenges due to weak demand for smartphones and personal computers (PCs).

However, the arrival of a new enabler in the form of AI has remarkably transformed TSMC’s fortunes in 2024, as evidenced by the impressive growth it recorded in the first nine months of the year. This is not surprising, as demand for AI chips has simply taken off, with Future Market Insights estimating that this market could see an annual growth rate of 26% over the next decade.

This puts TSMC in a great position to see robust growth in the coming years, given that it makes chips for major players in this market. Additionally, TSMC is the world’s leading foundry with a 62% market share, according to Counterpoint Research. This further reinforces that the company is set to play an important role in the growth of the AI ​​chip market in the long term.

However, that’s not where TSMC’s AI-related prospects end. The company also makes chips for consumer devices such as smartphones and PCs. AMD, AppleAnd Qualcomm use TSMC manufacturing plants to make chips for their products. With the demand for AI-enabled smartphones and PCs ready to take offthis could prove to be another lucrative growth engine for TSMC.

All of this explains why analysts expect TSMC to report healthy profit growth going forward.

TSM EPS Estimates for the Current Fiscal Year data by Y Charts

More importantly, investors can buy this stock at an attractive price of 21 times forecast earnings, which represents a discount to Nasdaq-100 multiple of 30 of the index’s forecast earnings (using the index as a proxy for technology stocks). Thus, investors looking to add a AI Actions to their portfolios in November should definitely take a closer look at TSMC as it has the potential to generate more upside.

2. Twilio

Twilio operates in the communications platform as a service (CPaaS) market, offering application programming interfaces (APIs) to customers, through which they can connect with their customers through multiple channels such as voice, video , chat, email and others. . The company also offers a customer data platform through which it creates a centralized database containing all the interactions a company has with its customers.

Twilio is now using AI to help its customers improve their customer service experience as well as their sales by combining its communications expertise with customer data. The company highlighted in its latest earnings conference call that it “integrates AI and machine learning throughout the Twilio platform,” a move it says will allow it to “automate capabilities, increase productivity, and drive deep personalization ladder”.

Management added that customers who started using Twilio’s AI tools saw an improvement in their business performance. CEO Khozema Shipchandler said during the earnings call:

Adoption of AI tools by Twilio customers is now driving improved sales for the company. In the third quarter, the company reported 10% year-over-year revenue growth to $1.13 billion, a nice improvement over the 5% year-over-year growth recorded in the same quarter. quarter of last year. Better yet, Twilio’s addition of AI tools to its platform encourages customers to spend more money.

This is evident from its 105% dollar net expansion rate for the third quarter, which again represents an improvement over last year’s figure of 101%. A net dollar expansion rate of more than 100% means that Twilio’s existing customers have increased their use of the company’s solutions or adopted more of its offerings. Effectively, this metric compares Twilio customer spending in a quarter to spending by the same group of customers in the previous year.

Improving customer spending and Twilio’s focus on cost containment are why its profits grew at an impressive 76% from the same period last year, to 1 $.02 per share in the previous quarter.

Consensus estimates project that Twilio’s earnings will grow at an annual rate of nearly 20% over the next five years, meaning its bottom line could reach $6.09 per share in 2028 (using earnings as a basis). of $2.45 per share in 2023).

Assuming it can reach that level over the next five years and trades (at that time) in line with the Nasdaq-100 Index’s 30x forward earnings multiple, its stock price could reach $183. This would represent a 110% increase from current levels.

Twilio currently trades at just 22 times forecast profitswhich means that it is attractively valued. Investors have the opportunity to buy it before it climbs higher following its last quarterly report.

Don’t miss this second chance and a potentially lucrative opportunity

Have you ever felt like you missed the boat by buying the best performing stocks? Then you will want to hear this.

On rare occasions, our team of expert analysts issues a “Doubled” actions recommendation for businesses that they believe are on the verge of collapse. If you’re worried that you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:

• Amazon: If you invested $1,000 when we doubled down in 2010, you would have $23,324!*

• Apple: If you invested $1,000 when we doubled down in 2008, you would have $42,133!*

• Netflix: If you invested $1,000 when we doubled down in 2004, you would have $420,761!*

Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.

See 3 “Double Down” Stocks »

*Stock Advisor returns as of November 4, 2024

Hard Chauhan has no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Advanced Micro Devices, Apple, Nvidia, Qualcomm, Taiwan Semiconductor Manufacturing and Twilio. The Motley Fool recommends Broadcom and Marvell Technology. The Motley Fool has a disclosure policy.