The next phase of the AI revolution will be very different from the initial growth surge — it will herald the birth of new leaders.
More than six years after Apple became the first public company to break through the $1 trillion market cap threshold, such companies remain in the minority: According to the latest research, only six companies have a 13-figure market cap (though Apple is still the largest at about $3.5 trillion).
But it's been a while since the world has been in a position to push more companies into the next tier of scale.
Right now, the AI market is still in its maturity stage, and AI is a huge opportunity. Some say AI is a once in a lifetime opportunity. And that may very well be true. Precedence Research predicts that the global AI industry will grow at an annual rate of 19% through 2034.
With that as a backdrop, here's a rundown of the next two stocks that could ride the AI wave to reach $1 trillion in market cap.
1. Taiwan Semiconductor Manufacturing
Taiwan Semiconductor Manufacturing Co., Ltd. (TSM -0.79%) isn't a well-known company, but chances are that at least one appliance in your home isn't made by the company.
Taiwan Semiconductor is considered a contract manufacturer, meaning it makes many of the microchips that other brands put their labels on. Some of the company's largest customers include NVIDIA, Qualcomm, and Apple. Customers provide chip designs and specifications to the manufacturer, which in turn provides the customer with processors and other technology components. This outsourcing arrangement ultimately tends to be cheaper for the brands than building and maintaining their own production facilities. Due to the cost-effectiveness of this model and the company's vast production capacity, it is estimated that Taiwan Semiconductor makes about two-thirds of the world's semiconductors and chips. The underlying dynamics behind this range are also unlikely to change in the near future.
That's not to say that customers aren't trying to reduce their reliance on a single company: Competitors are looking for ways to grab a larger share as well.
Yet many of these efforts ultimately depend on Taiwan Semiconductor. Intel is investing tens of billions of dollars in its own nascent chip foundry business, but still outsources manufacturing of semiconductors it can't make in-house to Taiwanese rivals. Similarly, Apple is moving ahead with plans to build a chip foundry in Arizona to avoid supply chain headaches like those caused by the COVID-19 pandemic. But a closer look at the details of these plans shows that these facilities are actually Taiwan Semiconductor, built as a way to better serve its customer, Apple, directly.
Either way, the imminent entrance of next-generation AI solutions will require more and better silicon. Precedence Research notes that while the overall AI market is growing rapidly, the AI chip market is expected to grow at an average annual rate of about 30% through 2032.
The company remains the biggest beneficiary of this impending market growth, given that Taiwan Semiconductor expects to be able to mass-produce 2nm (nanometer) chips by next year, making these processors up to 15% faster and consuming up to 30% less power than current top-of-the-line alternatives.
With the company's current market cap of $887 billion, still nowhere near the $1 trillion mark, it's reasonable to start wondering when Taiwan Semiconductor will reach a market cap of $2 trillion.
2. Broadcom
So what's the other company approaching 13-figure market cap? Broadcom (AVGO -1.99% ), which was valued at $772 billion at last count.
You probably know Broadcom as the communications and wireless technology company that emerged around the time computers and mobile phones first became popular. You might know it better as Avago. The two companies merged in early 2016, blending the already extensive product menus of both organizations.
What you may not know is that one of the biggest bottlenecks facing AI data centers today is not the speed of the processors doing the number crunching, but connecting all those processors onto a single integrated platform.
Broadcom comes to the rescue.
Continuing to develop cutting-edge connectivity solutions, in May the company announced its fifth-generation PCIe Ethernet adapter, which makes it easy and cost-effective to connect existing motherboards (and their processors) to every other motherboard in a data center network. And earlier this year, Broadcom introduced the world's first vertical-cavity surface-emitting laser (VCSEL), capable of transmitting digital data at an astounding 200 gigabits per second per lane.
Data centers have been waiting for such a high-speed solution, but the resulting technological leap would be so big that they would need time to prepare the infrastructure for it. The company believes it will begin commercial shipments of its fiber optic technology by the end of the year, helping the AI industry deploy platforms that are envisioned but not feasible with current technology.
Broadcom, meanwhile, will continue to make and sell more familiar products like home Wi-Fi chips, car connectivity platforms, cybersecurity tools, and traditional microchips. This business, along with growing demand for next-generation AI data center hardware, has analysts predicting the company's revenue will nearly double between now and 2028. Revenue could grow even further.
Technically it shouldn't be a problem, but it helps
A company's market capitalization is determined purely by its stock price and number of shares outstanding. It is not an indication of profitability or value. A trillion dollar valuation does not mean a cash bonus will be paid out to the company or its shareholders.
I mean, it's just a number.
Still, from a qualitative standpoint, this is a status-based accolade that could help bolster stock prices: A trillion-dollar market cap not only brings more investor attention to the companies, but it also ultimately puts Broadcom and Taiwan Semiconductor on par with the likes of Apple and Nvidia, which is no bad thing.
