This Billionaire Dumped Cloud Stocks for These New AI Stocks. Should Investors Follow Suit?

Billionaire portfolio manager Philippe Laffont of Coatue Management had a busy first quarter. The technology-focused investor significantly cut back his fund's stakes in the big three cloud providers Amazon, Alphabet, and Microsoft, while completely exiting his position in Oracle.

Meanwhile, he was buying a pair of semiconductor infrastructure enablers. He boosted his stake in Taiwan Semiconductor Manufacturing Co. (NYSE: TSM), which is his top holding, while adding a new position in ASML Holding (NASDAQ: ASML). The moves are interesting, as Laffont is shifting focus from the companies buying and using the tech to the companies that facilitate it.

I'm still a huge fan of the big cloud providers, with Amazon and Alphabet being two of my favorite stocks. Both have nice cost advantages given their chip businesses, while they also have strong, growing businesses outside of their cloud divisions. Meanwhile, Microsoft's software and cloud units are both performing well, and the stock looks undervalued for the opportunity in front of it. As such, I certainly wouldn't be dumping these stocks.

However, let's focus on what may have attracted Laffont to TSMC and ASML.

Taiwan Semiconductor Manufacturing: The foundry leader

Making logic chips isn't easy, so most semiconductor companies leave the manufacturing to third-party foundries. That is where Taiwan Semiconductor Manufacturing steps in. It is the world's largest foundry, and through its expertise and scale, it has a near-monopoly on manufacturing advanced logic chips like graphics processing units (GPUs).

While it has competitors in the space, what sets TSMC apart is its ability to produce advanced chips with high yields, meaning they have few defects. As nodes (chip density) have shrunk, other foundries have generally struggled in this area. At the same time, the company is also the leader in advanced packaging, where it can place GPUs side by side with high-bandwidth memory (HBM) through its CoWos (Chip-on-Wafer-on-Substrate) technology.

With its ability to do all this at scale, TSMC has become an invaluable part of the semiconductor value chain. This has also given the company strong pricing power, with reports that it has already told customers of planned multiyear price hikes. It's also helped lead to strong margins for the company.

One of the great things about an investment in TSMC is that the company wins no matter what chip technology grows the fastest or takes share, as it is the one manufacturing all of these chips, whether it be GPUs from Nvidia and AMD, or artificial intelligence (AI) application-specific integrated circuits (ASICs). The company should also see a new growth driver in its high-performance central processing units (CPUs), which are seeing demand surge with the rise of agentic AI. Overall, the company is one of the best ways to play the AI infrastructure boom without having to pick a winning technology.

Image source: Getty Images.

ASML Holding: The company behind AI chips

While TSMC manufactures the logic chips being used in the AI infrastructure build-out, ASML makes the machines that TSMC and other foundries use to create these chips. The company has a monopoly on extreme ultraviolet (EUV) lithography, which is the technology that makes advanced chipmaking possible.

As demand for advanced logic chips continues to grow and TSMC and other foundries expand capacity, they will need to buy more of ASML's machines. At the same time, memory makers also rely on ASML to help them increase their capacity. DRAM (dynamic random-access memory), including high-bandwidth memory (HBM), generally requires a combination of ASML's older DUV (deep ultraviolet) technology and EUV (extreme ultraviolet) machines for the more critical layers, while NAND typically only uses DUV machines.

With demand for advanced chips and memory continuing to grow, ASML is well positioned to benefit from this dynamic. Meanwhile, it has already developed a new technology called high-NA EUV, which should eventually be a growth driver. While TSMC has balked at the price of the new machines, others are starting to adopt the technology, and eventually the tech will be needed to further shrink nodes, setting ASML up well for future growth.

Geoffrey Seiler has positions in Advanced Micro Devices, Alphabet, and Amazon. The Motley Fool has positions in and recommends ASML, Advanced Micro Devices, Alphabet, Amazon, Microsoft, Nvidia, Oracle, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.