My 3 Favorite AI Stocks to Buy During the Chip Sell-Off, and Why Nvidia Isn't the Top Pick.

Chip stocks have been plummeting lately as investors pocket high gains. It's been good for several years now, and between high spending and high valuations, there are fears about what happens next. Chip stocks often move in cycles, and if this is the end of a supercycle, investors don't want to lose out.

But not all chip stocks respond the same way to a sell-off, and some chip stocks have more long-term prospects than others. Some are also priced to buy, while others are priced for perfection.

Image source: Alphabet.

Nvidia, for example, isn't my favorite chip stock to buy right now. Although it continues to grow at fantastic rates, other chip stocks might be gaining ground. Nvidia also might have a ceiling on gains, since it's already valued at more than $5 trillion.

Instead, as chip stocks fall, I'd load up on Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL), Amazon (NASDAQ: AMZN), and Taiwan Semiconductor Manufacturing (NYSE: TSM). Here's why.

1. Alphabet

Warren Buffett and Greg Abel have been piling into Alphabet stock, and the cloud and search powerhouse just plunged to its cheapest level in more than a decade. The market didn't like its artificial intelligence (AI) spend guidance for the year at $205 billion, topping even AI giant Amazon's $200 billion spend.

That reaction completely ignored Alphabet's outstanding second-quarter performance and advances in AI. Revenue increased 24% year over year, with a whopping 82% increase in cloud revenue, while operating income was up 30%.

It has a cloud backlog of $514 billion, and 2.4 million people use its Antigravity agentic AI development platform. Some 90% of Fortune 100 companies use its Gemini Enterprise platform, and there's been a 40% increase in daily active users making video since the company upgraded the Gemini app in May. Alphabet deserves some credit for demonstrating these kinds of results, and some confidence that it can ramp up AI successfully.

One of the features I love about Alphabet, and that Buffett likely does, too, is its diversified revenue streams. It has a chip business with its Tensor Processing Units (TPU), but that's just a part of its AI business. And AI is just a part of its broader tech business, which includes a highly dominant search engine, YouTube, Android, and much more.

Trading at 16 times trailing 12-month earnings, it looks priced to buy.

2. Amazon

I have a similar argument for Amazon. CEO Andy Jassy said that as a stand-alone business, its chip business has a $50 billion run rate and is one of the three largest chip businesses in the world. However, the market is worried about the company's spending and whether or not it's going to pay off, and Amazon stock is trailing the S&P 500 this year.

However, signs are pointing to the spend paying off. The company is reporting excellent growth, and management says that it will take some time until it's monetizing its spend at rates that outpace its near-term investing. However, revenue is increasing at high rates -- 17% year over year in the second quarter, with a 28% increase in cloud revenue, the highest in 15 quarters.

Like Alphabet, Amazon has a wide array of revenue streams beyond chips and AI, like e-commerce and streaming. That protects it from volatility in AI or its chips business. And Amazon stock is also trading at a low price, 28 times trailing 12-month earnings, just off a 10-year low.

3. Taiwan Semiconductor Manufacturing

Taiwan Semiconductor Manufacturing (TSMC) makes the chips that its clients design, and it works with all of the top chip companies, including Nvidia, Alphabet, and Amazon. TSMC is demonstrating robust growth, including a 34% year-over-year sales increase in the second quarter, and profitability has been soaring; operating margin expanded from 49.6% to 60.3%.

TSMC is also building out rapidly to meet rising demand. As all of its clients grow at breakneck speed, the company can barely keep up with them. It recently opened a U.S. location in Arizona, and it's heavily investing there, expecting to spend $265 billion on the campus. Management also raised its capital expenditure outlook for the year as it races to fill demand, and it doesn't anticipate any bottlenecks for the next few years.

Since TSMC works with many different clients and in a large range of technologies, it's not actually tied to the AI supercycle, even though that's what's driving growth right now. That gives the company healthy longevity prospects beyond current trends, which is why it's such a strong long-term choice.

However, the stock fell after its recent earnings report. While it's not at its cheapest levels, trading at a P/E ratio of 29, TSMC is worth some premium for its nearly fail-proof model.

Jennifer Saibil has positions in Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Alphabet, Amazon, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.