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Taiwan Semiconductor Manufacturing is at the source of the AI pipeline, producing essential chips.
Its monopoly on AI chipmaking gives it a competitive moat.
CrowdStrike Holdings has a data advantage over other cybersecurity companies due to its long-standing embrace of AI-native security tools.
Artificial intelligence (AI) has been touted as the most transformative technology since the creation of the internet. With the hype surrounding AI, its capabilities, and how it can drastically improve many companies' efficiency, an influx of investors is looking to take advantage of AI stocks and their long-term potential.
In the past few years, many such stocks have seen their prices surge with this new wave of investor interest. Some people have argued that this hype is just that: hype.
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However, there are some AI stocks that are positioned to outperform the market (compared to the S&P 500), even when you put short-term hype aside. When I think of AI-related companies capable of doing so over the next decade, the following two options come to mind.
Image source: Getty Images.
At first glance, a chipmaker like Taiwan Semiconductor Manufacturing (NYSE: TSM) might not seem like an AI company, but it's just as important to the technology as virtually any other company you can name.
TSMC, as it's also known, is at the source of the AI pipeline, producing the chips that power some of the most crucial components. When you think of companies like Nvidia, which designs the graphics processing units (GPUs) and accelerators for the data centers that make AI possible, you might not see TSMC's impact, but it's absolutely there. Nvidia and similar companies need TSMC's manufacturing ability like a fish needs water.
The reliance on TSMC, especially when it comes to AI chip manufacturing, is largely why the company's financials have surged. In the second quarter, revenue increased around 44% year over year (YOY), continuing its hot streak from the past few quarters. Here is its YOY revenue growth in the prior four quarters:
TSM Revenue (Quarterly) data by YCharts; ADR = American depositary receipts.
While smartphone chips have historically been TSMC's bread and butter, new AI chip demand has promoted its high-performance computing (HPC) segment into that role. It provided 60% of its total revenue in the second quarter, and with a monopoly-like stronghold on the market, it has a competitive moat that won't be changing soon.
Even if AI demand slows, TSMC has a diversified business that could maintain its momentum while hardly missing a beat.
Cybersecurity company CrowdStrike Holdings (NASDAQ: CRWD) isn't new to the AI game. The technology is an essential part of its DNA, with the company embracing machine learning and AI-native cybersecurity solutions since its August 2011 founding.
Numerous cybersecurity companies are flourishing, but CrowdStrike's recognition and business performance show just how effective it is. It was recently named a leader for endpoint protection, marking the sixth consecutive year. And for the third consecutive time, it ranked highest for "completeness of vision" and "ability to execute" by Gartner. And this is even after being responsible for the largest IT outage in history in July 2024.
CrowdStrike offers several solutions (called modules) that its customers have been embracing in bulk. At the end of its fiscal first quarter (ended April 30), 22% of its customers used at least eight modules, and 48% used at least six. This is key to sustained success because the more ingrained CrowdStrike is in a business' operations, the more dependent they become and the more it increases long-term recurring revenue.
Its subscription revenue came in at $1.05 billion during the latest quarter (around 95% of total revenue and up 20.5% YOY). The company says its high 80% gross margins on subscriptions at that scale were made possible with AI.
It's more than just using AI for typical cybersecurity threats, too. CrowdStrike is well positioned to help protect companies that are integrating AI into their own businesses, which could present new threats. Having dealt with AI for 14 years, it has plenty of training data and real-world experience under its belt that gives it a strategic advantage.
Cybersecurity is an industry that's progressively getting more important as more people and companies begin operating online. CrowdStrike estimates the AI-native cybersecurity market is around $116 billion this year and will grow to $250 billion by 2029.
CrowdStrike's high-dollar customer base (300 customers in the Fortune 500) is largely why I believe it has market-beating potential over the next decade. It has shown that its solutions are industry leaders, and this should only continue as the company collects more data and improves its models.
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Stefon Walters has positions in CrowdStrike and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends CrowdStrike and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.
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