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The 2020s will be the semiconductor decade as chip prevalence across industrial and consumer applications increases. Top semiconductor stocks reflect this positive outlook, with the VanEck Semiconductor ETF (NASDAQ:SMH) surging 61% year-to-date. For investors with a long-term view, more gains lie ahead.

The advent of generative AI has triggered an arms race. Companies are rushing to train large language models on large datasets, resulting in demand for sophisticated graphic processing units that can handle AI workloads has soared. Smart devices such as virtual assistants and thermostats require advanced chips to process information, and even traditional applications such as motor vehicles and industrial machinery use more chips.

The following companies are key players in the semiconductor ecosystem. They are highly profitable leaders that generate enormous free cash flows. Indeed, they will power technology and innovation for the next decade.

Nvidia (NVDA)

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With artificial intelligence in everyone’s mouths, Nvidia (NASDAQ:NVDA) has become one of the most important global companies. For generative AI applications to work, they rely on training done on large language models.

Nvidia designs high-level graphic processing units for AI processing and training. Its Nvidia A100 chips have become digital gold as companies contemplate how to apply AI to their business processes. Demand from cloud service providers such as Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Microsoft (NASDAQ:MSFT) has soared, since they have to upgrade their infrastructure services to suit AI applications.

Due to the soaring demand, Nvidia revenues and stock have skyrocketed. Despite these its continued highs, the stock is one of the top semiconductor stocks to buy today.

CEO Jensen Huang argues that AI has created a paradigm shift. Every company will now have to develop applications using an AI-first lens. Therefore, the data center will have a $1 trillion upgrade cycle. Cloud service providers will have to replace older chips that are unsuitable for AI applications.

As of this writing, Nvidia trades at 45 times fiscal year 2024 EPS. Consensus estimates predict 101% and 47% revenue growth in fiscal year 2024 and 2025, respectively. NVDA stock is a buy, considering its long-term growth potential as the multiyear data center replacement cycle takes shape.

Arm Holdings (ARM)

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Arm Holdings (NASDAQ:ARM) is a recent IPO with much promise. The company mainly licenses its energy-efficient CPUs and related technologies to semiconductor companies. Companies such as Apple (NASDAQ:AAPL) use its chip design architecture.

In prior years, over 50% of Arm Holdings’ revenue has come from royalties from smartphones and consumer electronics. Its architecture enables the design of power-efficient chips. As we advance, the company will be a crucial player in artificial intelligence chip design.

Recent quarterly results highlighted the potential as revenues surged due to investments in artificial intelligence. Total revenues were up 28% year-over-year. “Licensing revenue was up over 100% year-over-year as the demand for AI has kicked off increased investment across all end markets,” said Rene Haas, CEO.

The company is benefiting as AI chips increase the need for performance and power efficiency. Semiconductor companies are relying on Arm’s latest technologies to design high-performance chips for applications such as cloud computing and automotive.

Arm technology touches many applications such as smartphones, cloud computing, automotive and IoT. With artificial intelligence, there are more compute requirements. Companies are working with ARM to deliver power-efficient chips. For instance, it’s working with Nvidia for its Grace Hopper Superchip.

Over the next decade, ARM will see tremendous growth from the AI, the cloud and applications such as automotive. Notably, its royalty model allows for higher gross margins and profits since it only designs the chips. The secular growth and best-in-class margins make ARM one of the top semiconductor stocks to buy.

Taiwan Semiconductor (TSM)

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Although the semiconductor industry has tremendous growth ahead, it can be very competitive. A chip designer’s technology can quickly become obsolete from new competition. Therefore, buying foundries that manufacture semis for fabless semiconductor companies can be a better strategy than betting on the designers.

Taiwan Semiconductor (NYSE:TSM) is the largest semiconductor foundry in the world. The company doesn’t design chips. Instead, it manufactures semiconductors for various companies. Semiconductor designers such as Apple, Qualcomm (NASDAQ:QCOM), Advanced Micro Devices (NASDAQ:AMD) and Nvidia rely on the company to produce and package its chips.

The company has concentrated on semiconductor manufacturing for decades. Due to its technology leadership in the manufacturing process, it is one of the top semiconductor stocks. The company can manufacture some of the most miniature and sophisticated chips. Through the years, the company has remained a leader in node advancement.

Today, Taiwan Semi can manufacture high-performance and smaller chips at the lowest cost. It maintains a massive technological advantage over smaller foundries such as GlobalFoundries (NASDAQ:GFS) and United Microelectronics Corporation (NYSE:UMC). Notably, it manufactures 5nm chips that these competitors can’t.

As artificial intelligence, high-performance computing and IoT applications grow, the company’s foundry business could grow for decades. The recent revenue growth in October was a positive for the stock. Increasing demand from Apple’s new iPhone and artificial intelligence spurred growth. At a price-to-earnings of 19, TSM stock is a buy, considering the substantial growth ahead.

On the date of publication, Charles Munyi did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Charles Munyi has extensive writing experience in various industries, including personal finance, insurance, technology, wealth management and stock investing. He has written for a wide variety of financial websites including Benzinga, The Balance and Investopedia.

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Original: MSFT Feed: The 3 Top Semiconductor Stocks Powering the Tech Boom