Earlier this week, the tech-heavy Nasdaq Composite Index re-entered correction territory, which meant it was trading 10% below record levels. While investors are worried about the possibility of an economic recession, the ongoing volatility provides you an opportunity to buy quality companies as part of the artificial intelligence (AI) megatrend.
Here are two AI stocks you can buy today and benefit from outsized gains when market sentiment improves.
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Broadcom stock
Valued at $739 billion by market cap, Broadcom (NASDAQ: AVGO) is among the largest companies in the world. However, the stock is down 13.5% from all-time highs as Wall Street was unimpressed with its recent quarterly results.
In fiscal Q3 of 2024 (ended in July), Broadcom reported revenue of US$3.1 billion and adjusted earnings of US$1.24 per share. Comparatively, Wall Street forecast revenue at US$13 billion and earnings at US$1.20 per share. While Broadcom beat Q3 estimates, its revenue forecast of US$14 billion for the current quarter was marginally below consensus projections.
Despite the pullback, Broadcom stock has been up 84% in the last year. If we adjust for dividends, cumulative returns have been over 2,200% in the last 10 years, easily outpacing the broader indices.
Despite its stellar returns, AVGO stock is priced at 26 times forward earnings, which is quite cheap given that the company is positioned to benefit from the AI megatrend. Broadcom produces multiple hardware products that are used to build AI infrastructure. Broadcom expects AI-based sales to touch US$12 billion in fiscal 2024, higher than its previous estimate of US$11 billion.
Additionally, Broadcom pays shareholders an annual dividend of US$2.12 per share, indicating a forward yield of 1.3%. Its dividend payout has risen at a compound annual growth rate of over 30% in the past decade, which is exceptional, to say the least.
Broadcom generates enough cash flow to target accretive acquisitions, service its balance sheet debt, and raise its dividends further. In the last 12 months, its free cash flow has risen to US$18.7 billion, up from US$9.3 billion in fiscal 2019. Comparatively, its dividend and interest payout stand at US$9.9 billion and US$3.4 billion, respectively.
Taiwan Semiconductor stock
Valued at $883 billion by market cap, Taiwan Semiconductor (NYSE: TSM) is the world’s largest contract chip manufacturer. In fact, it manufactures chips for several companies, including Nvidia and Apple.
TSMC expects demand for AI chips to drive top-line growth higher in the upcoming decade. Demand for these chips is expected to grow by 50% annually through 2027, and TSM’s AI-chip sales will account for 20% of total sales by the end of 2027.
Its wide competitive moat allows the company to benefit from elevated profit margins. In the last four quarters, TSM has reported revenue of US$75.8 billion and operating income of US$31.9 billion, indicating a margin of 42%. With US$22.3 billion in free cash flow, Taiwan pays shareholders an annual dividend of US$2.47 per share, implying a yield of 1.5%.
Priced at 20.6 times forward earnings, TSM stock is quite cheap, given analysts expect earnings to grow by 21.5% annually in the next five years. Down 11% from all-time highs, TSMC stock trades at an 18% discount to consensus price target estimates.
