Why TSMC, KLA, and Lam Research Stocks All Popped on Monday

Good news from Taiwan's Hon Hai Precision Industry company (better known as Foxconn) spread to the benefit of semiconductor stocks in general today. Foxconn reported 15% sales growth in Q4 2024, to $63.9 billion, a number that CNBC characterized as "bumper sales performance."

The implied strong demand for AI semiconductor chips launched shares of Taiwan Semiconductor Manufacturing Company (NYSE: TSM) to an all-time high at Monday's opening bell. As of 10:35 a.m. ET, TSMC stock remains up a solid 4.9%. Shares of KLA (NASDAQ: KLAC) and Lam Research (NASDAQ: LRCX), both of which supply semiconductor manufacturing equipment to TSMC, are doing even better, up 5% and 5.8%, respectively.

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What Foxconn said about AI

Commenting on the results, CNBC noted that Foxconn saw "slight declines" in sales of PCs and smart consumer electronics, but its cloud and networking products, including servers used to support AI functions, enjoyed robust growth. Investors quickly extrapolated from this that growth should be good at leading AI chipmaker Nvidia and at its contract manufacturer TSMC, as well as at the companies that make the machines that enable TSMC to make those chips, KLA and Lam Research.

Further strengthening this thesis, on Friday Microsoft announced plans to invest "$80 billion to build out AI-enabled datacenters to train AI models and deploy AI and cloud-based applications around the world."

Long story short, the AI revolution looks to be far from over. Investors are buying shares of just about everybody and anybody involved in this industry today.

Image source: Getty Images.

Which AI stock should you buy?

That doesn't necessarily mean that you should be buying AI stocks indiscriminately, however.

On the one hand, yes, if Foxconn's good news and Microsoft's massive investments mean that AI growth will continue in 2025, there probably are bargains to be found. TSMC stock, for example, sells for about 28 times trailing earnings today, and Wall Street analysts agree the stock is probably going to keep on growing earnings at 28% or so annually over the next five years. This implies that TSMC stock, at least, remains fairly priced.

KLA stock, on the other hand, costs more than TSMC (29 times earnings as opposed to 28 times) and the company is growing slower. Analysts forecast only a 15% long-term growth rate for KLA, giving the shares a price/earnings-to-growth (PEG) ratio of nearly 2, which is stretching the definition of what I'd call a "fair price." (KLA also pays a smaller dividend yield than does TSMC, only 1% as opposed to 1.7%.)

In between these two choices lies Lam Research. Priced at 23.5 times trailing earnings, pegged for a 15.5% long-term growth rate, and paying a 1.2% dividend yield, Lam isn't quite as expensive as KLC stock -- nor quite as cheap as TSMC stock.

After weighing the three alternatives, I still think TSMC stock gives you the best bang for your AI investing buck.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lam Research, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.