2 No-Brainer Chip Companies to Ride the Artificial Intelligence (AI) Investing Wave

When you hear about artificial intelligence (AI) investing, you may think of the software powered by the technology or the hardware that trains the model. However, investors should also think of the chips that go into these devices to power the AI models.

The chip market is a huge investment opportunity, as these companies make chips for all competitors in the AI arms race, making them a neutral way to invest in the trend. Two of my favorite companies in this space are Taiwan Semiconductor (NYSE: TSM) and ASML (NASDAQ: ASML). Without these two, none of the technologies seen today would be possible, and both companies are vital suppliers in the AI arms race.

Taiwan Semiconductor is a contract chip manufacturer, which means that companies like Apple and Nvidia design the chip, and then TSMC fabricates it. This is a great position to be in, as it allows TSMC to focus on being a top-notch manufacturer and not have to worry about marketing its products. Additionally, TSMC has the unique position of being able to sell to both sides of the competition, as TSMC manufactures chips for AMD as well as other custom AI accelerators that are competing against Nvidia for market share.

As a neutral party, TSMC also has a great view of the future demand for AI chips. Over the next five years, Taiwan Semi's management is extremely bullish on the prospects of its AI-related chips. They project these chips will grow revenue at a 45% compound annual growth rate (CAGR) over that five-year period. That's rapid growth, and it all flows into the company's overall projected revenue growth rate of 20% for the next five years.

Clearly, TSMC has some massive tailwinds blowing in its favor, and thanks to its culture of continuous improvement, it will continue to be a top chipmaker for some time.

While ASML doesn't manufacture chips, it produces the machines required to make these cutting-edge chips. Its extreme ultraviolet lithography machines allow clients to lay the microscopic electrical traces on a chip, and it is the only company in the world with the technology to do so. This technological monopoly is unlikely to be overtaken, as it took decades of research and billions of investment dollars to get ASML where it is today.

Because ASML's machines are essentially a gateway to producing the world's most powerful chips, its machines are highly regulated. There are many machines that ASML cannot sell to China, as the Netherlands (where ASML is based) and the U.S. do not want the devices to fall into China's hands, which could allow them to gain an advantage over Western countries in many important fields. While ASML is still allowed to sell some of its lower-powered models, the list of what it is allowed to sell to China is continuously shrinking.