Undervalued and Profitable: 3 Artificial Intelligence (AI) Stocks for Buffett-Minded Investors

Motley Fool

Key Points

Warren Buffett's never been a big fan of technology stocks. He says they're too difficult to understand and often vulnerable to change. He'd rather own more predictable picks, which means he prefers investing in already-profitable companies with simple business models. This preference disqualifies many artificial intelligence (AI) stocks from becoming a Berkshire Hathaway holding.

Not every technology stock, however, is the clichéd dot-com type of investment that Buffett has sought to avoid. A handful of AI stocks are arguably justifiable additions to Berkshire's portfolio based on their predictability, profitability, and of course, their potential upside.

Here's a closer look at three such AI prospects that Buffett might actually approve of if given a closer look. They may be a good way of adding some AI exposure to your portfolio as well.

Arm Holdings

OK, Arm Holdings' (NASDAQ: ARM) revenue and earnings may not be perfectly predictable from one quarter to the next. The company's top and bottom lines do reliably grow though, and it is reliably (and increasingly) profitable.

ARM Revenue (Quarterly) data by YCharts.

But what is it? This company is frequently categorized as a semiconductor stock, which isn't an inaccurate description. It's not a manufacturer in the same vein as Intel (NASDAQ: INTC) or Qualcomm, though. Rather, Arm only designs microchip architecture and then licenses this intellectual property to chipmakers that often outsource the production of these chips to a third-party manufacturer. For instance, Apple's (NASDAQ: AAPL) latest iPhone processors are based on Arm's chip architecture, but this particular silicon is actually made (per Apple and Arm's specs) by a company called Taiwan Semiconductor Manufacturing (NYSE: TSM), also known as TSMC.

Arm only collects a relatively small amount of revenue for every iPhone sold with its tech built into it. But since Arm incurs no production or distribution costs, this is high-margin revenue. Last fiscal year Arm Holdings turned $4 billion worth of sales into nearly $800 million worth of net income.

Given the technological prowess of outfits like Intel, Apple, and Qualcomm, it seems strange that they should rely on -- and pay -- a company like Arm for something as relatively common as chip design. But it actually makes a lot of sense for a couple of reasons.

First, all of Arm's know-how is patented, so using it would be illegal even if it is a logical and intuitive solution. And second, Arm's solutions are actually superior, particularly when it comes to power efficiency. Its cloud-computing data center processors require up to 60% less electricity than comparable processors from rivals, for example, answering one of data center operators' biggest frustrations.

That's why Arm believes it could control as much as half of the data center processor market by the end of this year, up from only about 15% as of 2024.

Taiwan Semiconductor

Taiwan Semiconductor Manufacturing doesn't just make Apple's newest Arm-based iPhone processors. It manufactures high-performance chips for most of the major semiconductor names including Nvidia, Qualcomm, Advanced Micro Devices, and Broadcom -- just to name a few. Indeed, analysts' estimates put TSMC's market share of global production of high-performance processors anywhere from 80% to as high as 90%.

What gives? As it turns out, manufacturing computer processors is complicated and expensive. It's often easier and cheaper to punt this work to an organization with the experience, expertise, and capacity to make these chips than it is to try and do it yourself. Over the course of the past couple of decades, TSMC has emerged as the industry's premier contract manufacturer

This satisfies a couple of Buffett's most important rules for buying stocks. As he advises, look for proven, high-quality companies with a wide competitive moat. TSMC offers both.

A handful of chipmakers are attempting to wean themselves from reliance on silicon made in the Pacific region particularly by TSMC. Back in 2022, for instance, Intel committed billions of dollars to establishing its own chipmaking foundries in Europe and the U.S.

The fact that much of this work has been delayed due to complications and recently scaled back, however, underscores the difficulty of getting into or expanding the chipmaking business when players like TSMC are already so well established and so far ahead, technology-wise. Apple's strategy is more aligned with reality. It's partnering with TSMC to establish a manufacturing presence within the U.S. that it can enjoy some control of and that won't simultaneously require it to fend off competition while these factories are being built.

More important to Buffett-minded investors, while the business may ebb and flow from time to time, the world's never not going to need new and better computer chips.

DigitalOcean

Finally, add DigitalOcean (NYSE: DOCN) to your list of undervalued and profitable AI stocks that Warren Buffett could appreciate.

It's probably the least-known name of the three AI prospects in focus. In fact, there's a good chance you've never even heard of it. Its market cap of less than $3 billion just doesn't turn many heads, and it's seemingly not nearly as critical to the AI industry as Arm or TSMC.

Don't be dissuaded by its relatively small size or lack of recognition. It's arguably the most Buffett-like of all three AI stocks highlighted here.

DigitalOcean provides a range of cloud-based services to clients that simply want to outsource their data center needs. These include blockchain solutions, simple web hosting, video streaming technologies, online video games platforms, and yes, a whole bunch of AI solutions like AI training, virtual customer service agents, and automated coding. Although DigitalOcean doesn't strictly serve the AI industry, AI is an increasingly bigger profit center.

But that's not what makes this outfit such a Buffett-esque pick. Rather, Warren Buffett would very likely fall in love with this stock due to the nature of its business model and the fact that it's reliably profitable. DigitalOcean's clients pay for access to its technological solutions on a predictable, monthly basis. As of Q1 of this year, its annualized recurring revenue run rate stands at $843 million (up 14% from the year-earlier comparison) versus 2024's total top line of $781 million, of which $84 million was turned into net income.

As long as the world needs the cloud -- and needs cloud-based AI solutions in particular -- this company's revenue and earnings are apt to grow in step with both industries.

Should you buy stock in Arm Holdings right now?

Before you buy stock in Arm Holdings, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Arm Holdings wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you’d have $625,254!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $1,090,257!*

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*Stock Advisor returns as of July 29, 2025

James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Berkshire Hathaway, DigitalOcean, Intel, Nvidia, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and recommends the following options: short August 2025 $24 calls on Intel. The Motley Fool has a disclosure policy.

Undervalued and Profitable: 3 Artificial Intelligence (AI) Stocks for Buffett-Minded Investors was originally published by The Motley Fool

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Tesla’s Samsung order shift unlikely to hurt TSMC: Morgan Stanley

Investing.com

Taiwan Semiconductor

-4.20%

Ategrity Specialty Insurance

+4.17%

Tesla

+2.70%

Investing.com -- Tesla’s decision to shift some semiconductor orders to Samsung (KS:005930) starting in 2027 is unlikely to have a major impact on TSMC’s earnings or valuation, according to Morgan Stanley.

“We see limited impact to our TSMC EPS assumptions from 2027 and we don’t expect TSMC stock to de-rate because of Tesla (NASDAQ:TSLA) shifting some orders to Samsung Foundry,” analysts wrote.

Tesla recently signed a $16.5 billion chip deal with Samsung, with the new AI5 chip, set to launch in January 2026, still being manufactured using TSMC’s 3nm process.

Morgan Stanley noted that the AI5 is expected to deliver four to five times the performance of its predecessor and will continue production through 2026.

Although the AI6 chip will reportedly shift to Samsung in 2027 using a 2nm process, the bank estimates this represents only about a 1% revenue loss for TSMC.

“Strategically, we would never assume TSMC can acquire 100% market share in the leading edge,” Morgan Stanley said, citing common practices of using multiple foundry partners for pricing and engineering flexibility.

Moreover, the firm expects TSMC to continue supplying Tesla and x.AI’s cloud AI chips.

“We are also seeing a 3nm AI ASIC from x.AI to be produced in 2026 through TSMC’s design service partner GUC,” analysts noted, estimating those cloud AI chips could add 0.5% to 2027 revenue.

Morgan Stanley also highlighted longer-term growth potential in China’s smart and AI vehicle market, calling it “a viable long-term growth driver for TSMC.”

Tesla’s Samsung order shift unlikely to hurt TSMC: Morgan Stanley

Surge of 50% since our AI selection, this chip giant still has great potential

Apollo economist warns: AI bubble now bigger than 1990s tech mania

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Samsung’s Big Tesla Order Fuels Recovery Bets Despite Chip Woes

Bloomberg

(Bloomberg) -- Samsung Electronics Co.’s surprise $16.5 billion chipmaking deal with Tesla Inc. has breathed new life into a foundry business all but written off by many investors.

Its stock has risen 9% since news about the agreement on Monday, bringing Samsung’s gains in July to over 20% and putting the stock on track for its best month in more than four years. Samsung accounted for more than half of July’s gains in Korea’s stock benchmark Kospi, underscoring growing investor enthusiasm.

The Tesla deal is significant as it marks a shift for the ailing foundry business — from relying on captive internal orders to deeper external engagements, Citigroup analysts said in a report. A successful implementation would boost Samsung’s prospects for generating more external clients and validate its investment in a US plant.

“I think market basically paid not even zero value — negative value — on foundry business so far, and suddenly market checked and said ‘Okay! they still can do’,” said Young Jae Lee, senior investment manager at Pictet Asset Management Ltd., who has Samsung as the biggest position in his $831 million fund.

Once considered a serious challenger to Taiwan Semiconductor Manufacturing Co., Samsung has steadily ceded ground in the global chip race. The company, which supplies its own memory chips and produces semiconductors for clients, has struggled to fill its foundry capacity as major customers such as Apple Inc. exited and its high-bandwidth memory (HBM) business has gone woefully off track.

The order announcement comes more than a year after Samsung replaced the head of its semiconductor business with seasoned memory expert Jun Young-hyun in a bid to restore the company’s technological edge. Under Jun’s leadership, Samsung replaced the head of the foundry business with Han Jin-man, a highly regarded executive at its chip division in the US and recruited Margaret Han, a former Intel Corp. and TSMC executive, to lead Samsung’s US foundry business.

The deal also secures long-term utilization of its facility in Taylor, Texas, which has suffered from construction delays. Samsung is expanding production there with support from the 2022 Chips and Science Act, Washington’s effort to rebuild the American semiconductor industry with billions in subsidies and tax incentives for the likes of Intel. Morgan Stanley analysts Shawn Kim and Michelle Kim estimate the partnership with Tesla could add more than $50 billion to Samsung’s market value.

“Tesla’s AI6 chip announcement validates Samsung’s advanced nodes at its US fab, an endorsement that stands out amid Intel’s well publicized struggles with domestic manufacturing,” said Gary Tan, portfolio manager at Allspring Global Investments in Singapore.

There’s still caution about calling the Tesla tie-up the start of a meaningful turnaround, but it gives ground for greater optimism around South Korea’s largest company.

“Samsung now has the narrative tailwinds and the cash flow support to justify more constructive positioning, but it still needs to prove execution in AI chips beyond just this Tesla headline,” said Haris Khurshid, chief investment officer at Karobaar Capital, a Chicago-based firm. “I’d expect some consolidation until earnings prove that this is more than just a headline trade.”

Some analysts say the company’s other problems are likely to remain. For the first time in April, homegrown rival SK Hynix Inc. overtook Samsung as the world’s biggest producer of DRAM chips. Samsung has also struggled to secure approval from Nvidia Corp. for its latest HBM offerings.

But Tan said Nvidia’s latest line of AI chips “presents Samsung with an opportunity to regain momentum in advanced memory.”

Despite the slow pace of development, JPMorgan Chase & Co. in a July 8 note said it has noticed growing interest from investors on “Samsung’s comeback in the high-bandwidth memory market.”

The company is expected to give more details on the Tesla deal and the outlook for the second half of the year on Thursday when it reports its full second-quarter earnings. It said earlier this month its preliminary operating profit fell by a sharper-than-expected 56% on inventory writedowns that followed the US curbs on Chinese-bound AI chips.

Investors will also be keen to get details on whether Samsung would be able to benefit from Nvidia’s resumption of sales of its H20 AI chips to China. The Korean memory maker has provided HBM3 to pair with H20 chips in the past.

The stock is in a better position than last year, when company management issued a rare public apology for disappointing results. But despite the fanfare, analysts warn the rally may be overextended in the short term. Technical indicators show Samsung shares are trading at overheated levels, and consensus targets imply the smallest 12-month upside in more than four years.

--With assistance from Yoolim Lee and Vlad Savov.

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5 Things to Know Before the Stock Market Opens

Investopedia

U.S. stock futures are pointing slightly higher after the S&P 500 and Nasdaq again hit record closing highs; Union Pacific (UNP) agrees to acquire fellow rail giant Norfolk Southern (NSC) for $85 billion; UnitedHealth Group (UNH) shares are falling in premarket trading after it slashes its full-year profit outlook; Nvidia (NVDA) reportedly orders 300,000 H20 chips from contract manufacturer TSMC (TSM) amid strong demand in China; and United Parcel Service (UPS) shares are dropping after its quarterly profit comes up short of analysts' estimates. Here's what investors need to know today.

1. US Stock Futures Edge Higher After Nasdaq, S&P 500 Hit Fresh Record Highs

U.S. stock futures are edging higher after the S&P 500 and Nasdaq again hit record highs, as investors monitor incoming earnings reports. Nasdaq futures are 0.5% higher after the tech-heavy index closed at a record high for the 10th time in 11 sessions, while S&P 500 futures are up 0.3% after its sixth-straight record close. Dow Jones Industrial Average futures are little changed. Bitcoin (BTCUSD) is slightly higher at about $118,500. The 10-year Treasury note yield is slightly lower. Gold futures are higher. Oil futures are little changed.

2. Union Pacific to Acquire Norfolk Southern for $85B

Union Pacific (UNP) and Norfolk Southern (NSC) announced that the two railroad giants were combining, creating the country's first transcontinental railroad. Union Pacific will buy Norfolk Southern for $320 per share in an $85 billion deal that will connect 50,000 miles of railroad across 43 states, linking approximately 100 North American ports. The combined company will be worth over $250 billion. The deal follows reports that the two companies were in merger discussions. Union Pacific shares are up less than 1% in premarket trading, while those of Norfolk Southern are down more than 2%.

3. UnitedHealth Stock Slips After Firm Slashes Profit Outlook

UnitedHealth Group (UNH) shares are slipping 1.5% after the health insurance giant slashed its full-year profit outlook as its second-quarter earnings came in well below analysts' estimates. The insurer posted adjusted earnings per share of $4.06 on revenue that increased about 13% year-over-year to $111.6 billion, both below analyst projections compiled by Visible Alpha. Its estimates for full-year earnings per share were slashed by about $10 as the company saw "higher realized and anticipated care trends." UnitedHealth said it "expects to return to earnings growth in 2026."

4. Nvidia Orders 300,000 H20 Chips From TSMC, Report Says

Nvidia (NVDA) placed orders with contract manufacturer Taiwan Semiconductor Manufacturing Co. (TSM) for 300,000 AI-focused H20 chips as it adds to its stockpiles amid strong Chinese demand, according to a report in Reuters. Earlier this month, the Trump administration gave approval for Nvidia to resume sales of its H20 chip in China after previously issuing restrictions on the AI chip. During a trip to Beijing earlier this month, Nvidia CEO Jensen Huang said that the level of orders it received would determine whether it would order more production of the chip, according to the report. Nvidia shares are higher by more than 1% in premarket trading while U.S.-listed shares of TSMC are moving slightly lower.

5. UPS Stock Falls as Profit Comes Up Short

United Parcel Service (UPS) shares are 4% lower in premarket trading after the shipping giant posted worse-than-expected quarterly profit while failing to provide a revenue or earnings outlook. UPS reported adjusted earnings per share of $1.55, lower than estimates from analysts surveyed by Visible Alpha. Its revenue fell 3% from year-ago levels but was above projections. UPS said it is not providing a revenue or profit forecast "given the current macro-economic uncertainty.” UPS shares entered Tuesday down about 20% this year

Read the original article on Investopedia

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Nvidia Stock Gains. Why Its AI Chip Sales Are Set to Boom in China. — Barrons.com

Dow Jones Newswires

Advanced Micro Devices

By Adam Clark

Nvidia stock was rising Tuesday with sales of its artificial-intelligence processors seemingly poised to surge in China.

The chip maker's shares were up 1.4% at $179.23 in premarket trading. The stock rose 1.9% on Monday, marking another record close.

While attention is on U.S. technology company earnings and what they say about AI demand — with Amazon.com, Microsoft, and Meta Platforms all reporting this week — Nvidia also looks set to benefit from sales in China.

Nvidia has placed an order for 300,000 of its H20 chips for the Chinese market with Taiwan Semiconductor Manufacturing, adding to an existing stockpile of between 600,000 and 700,000 to meet strong demand, Reuters reported Tuesday, citing anonymous sources.

Nvidia declined to comment on the report. The Trump administration recently reversed its export curbs on the H20 chip, which Nvidia said cost it $10.5 billion in revenue across its April and July quarters.

Among other chip makers, Advanced Micro Devices was rising 1.6% and Broadcom was up 0.8% in premarket trading.

Write to Adam Clark at adam.clark@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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Billionaire Stanley Druckenmiller Exited 38 Stocks, Including Palantir, but More Than Quintupled His Stake in This Trillion-Dollar Artificial Intelligence (AI) Stock

Motley Fool

Palantir Technologies Inc. Class A Common Stock

-2.12%

Taiwan Semiconductor

-4.20%

Key Points

Information is the lifeblood of Wall Street. However, trying to analyze earnings reports from hundreds of influential public companies, while also keep a watchful eye on U.S. economic data releases and proposed policy changes from the Donald Trump administration, can be overwhelming and allow something of importance to slip through the cracks.

Two months ago, on May 15, institutional investors with at least $100 million in assets under management were required to file Form 13F with Securities and Exchange Commission -- and investors might have missed it. This filing allows investors to see which stocks Wall Street's most-successful money managers purchased and sold during the March-ended quarter. In other words, it's an easy way for investors to spot which stocks, industries, sectors, and trends have the undivided attention of the market's top fund managers.

Though Warren Buffett has the largest following among top-tier asset managers, he's not the only billionaire investor with a knack for spotting amazing deals. Investors also closely follow Duquesne Family Office's Stanley Druckenmiller for ideas.

Druckenmiller was especially active during the first quarter. He oversaw the complete sale of 38 stocks, including one of the hottest artificial intelligence (AI) companies on the planet, Palantir Technologies (NASDAQ: PLTR). Meanwhile, one of the few stocks he piled into was a trillion-dollar AI company.

Billionaire Stanley Druckenmiller cleaned house in the March-ended quarter

Though Duquesne Family Office's billionaire chief invests in a broad swath of industries, there was certainly a tech vibe to his selling activity in the first quarter. Arguably the most jaw-dropping of these sales was jettisoning all 41,710 shares of Palantir Technologies.

The simple fact that Druckenmiller reduced his fund's number of holdings from 78 to 52 over a three-month period speaks volumes. It strongly implies that Duquesne's leader isn't thrilled with the stock market pushing to one of its priciest valuations in history. Duquesne Family Office has an average hold time of less than nine months for its 52 holdings, which suggests Druckenmiller and his team aren't shy about locking in gains.

With regard to AI-data-mining specialist Palantir, its shares have climbed by an almost unfathomable 2,370% since the start of 2023. Most megacap stocks don't tack on $360 billion in market value in such a short time frame. Palantir's parabolic ascent gave Druckenmiller every reason to cash in his chips.

But there's probably more behind this selling activity than just a desire lock in gains.

In a May 2024 interview with CNBC, Duquesne's head investor summarized the AI movement as being overhyped in the short run but likely under-hyped over the long-term.

Since the proliferation of the internet in the mid-1990s, every game-changing investment opportunity has endured an early stage bubble-bursting event. This is a reflection of investors overestimating how quicky a new technology will gain utility and/or widespread adoption. Though AI spending is robust, it's fairly evident that most businesses haven't yet optimized their AI solutions, nor are many generating a positive return on their AI investments. In short, a bubble is likely brewing.

The good news for Palantir is that an AI bubble-bursting event wouldn't cripple its cash flow. Its Gotham segment locks in revenue via multiyear contracts with federal governments. Meanwhile, its newer Foundry platform for businesses is subscription-based. Nevertheless, weak investor sentiment in the wake of a bubble-bursting event would almost certainly drag down Palantir stock.

The other issue that can't be swept under the rug is Palantir's valuation. Palantir closed out the previous week at a price-to-sales (P/S) ratio of 127! For context, this is somewhere between three and four times higher than where other megacap companies saw their bubbles burst during the dot-com era. Druckenmiller likely expects a sizable correction in Palantir stock.

A person wearing gloves and a sterile coverall who's closely examining a microchip. — Image source: Getty Images.

Duquesne's billionaire investor upped his stake in this trillion-dollar stock by 457%

On the other end of the spectrum, Stanley Druckenmiller welcomed 12 new stocks to his fund, as well as added to existing stakes in 14 others during the first quarter. While many of these adds were modest, this wasn't the case with world-leading chip fabrication company Taiwan Semiconductor Manufacturing (NYSE: TSM), which is commonly known as "TSMC."

Druckenmiller has purchased shares of TSMC for three consecutive quarters, beginning in the third quarter of 2024. But in the March-ended quarter, he really began depressing the accelerator. Duquesne's 13F shows 491,265 shares were purchased, representing a 457% increase from the prior three-month period. It would appear that while Druckenmiller believes AI is overhyped in the short run, he's nevertheless found a new favorite artificial intelligence stock.

The investing lure for TSMC is the key role it plays in the proliferation of advanced AI graphics processing units (GPUs). Taiwan Semi is in the process of expanding its monthly chip-on-wafer-on-substrate (CoWoS) capacity from 35,000 units in 2024 to an estimated 135,000 units by 2026. CoWoS is a technology necessary for the packaging of high-bandwidth memory in high-compute data centers.

While expanding CoWoS capacity almost fourfold in a two-year period is impressive, it still may not be enough to satiate enterprise demand. However, it can only mean good things for TSMC's order backlog and pricing power. During the second quarter, 60% of the company's net sales came from high-performance computing, which is up from 52% in the comparable quarter from 2024.

Though it's easy to get really excited about the future of AI and the role this trillion-dollar company will play in facilitating the manufacture of advanced GPUs, it's important not to overlook that Taiwan Semi is a well-diversified machine.

For instance, 27% of TSMC's net sales during the June-ended quarter traced back to wireless chips and accessories used in next-generation smartphones. Even though growth in smartphone sales isn't what it used to be, the consistent evolution and upgrade cycles associated with smartphones leads to consistent operating cash flow and modest long-term growth potential.

The same can be said about TSMC's automotive and Internet of Things segments, which collectively accounted for 10% of its net sales during the first half of 2025. As new vehicles and household appliances become more technology dependent, chip demand is only going to grow.

Taiwan Semiconductor Manufacturing is also reasonably valued, when compared to the likes of Palantir. Whereas Palantir is trading at approximately 215 times forward-year earnings, TSMC can be scooped up for roughly 22 times forecast earnings in 2026. While a forward price-to-earnings multiple of 22 is higher than TSMC's historical average, the company's penchant for blowing past Wall Street's expectations suggests its stock may head even higher.

Should you buy stock in Palantir Technologies right now?

Before you buy stock in Palantir Technologies, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Palantir Technologies wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you’d have $636,628!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $1,063,471!*

Now, it’s worth noting Stock Advisor’s total average return is 1,041% — a market-crushing outperformance compared to 183% for the S&P 500. Don’t miss out on the latest top 10 list, available when you join Stock Advisor.

*Stock Advisor returns as of July 28, 2025

Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.

Billionaire Stanley Druckenmiller Exited 38 Stocks, Including Palantir, but More Than Quintupled His Stake in This Trillion-Dollar Artificial Intelligence (AI) Stock was originally published by The Motley Fool

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Samsung Stock Surges. Why It Needed the Tesla AI Chip Deal So Much. — Barrons.com

Dow Jones Newswires

Advanced Micro Devices

By Adam Levine

Tesla is the first big customer to publicly announce using Samsung Electronics' new Texas chipmaking factory, and it is an important vote of confidence for the troubled manufacturer.

Tesla CEO Elon Musk took to his X platform late Sunday evening to announce two new generations of advanced chips. The EV maker intends to use Samsung's coming Taylor, Texas factory, under construction until late 2026, to manufacture the second of the two. The first will be made by Taiwan Semiconductor Manufacturing, the undisputed leader in the industry and Samsung's chief rival in chip manufacturing.

Samsung's Korean shares were up nearly 7% Monday on the news, continuing a recovery in the stock price after a 2024 plunge. Tesla shares were up 3.7% midday on Monday.

Samsung slated the Tesla contract at $16.5 billion through 2033. The deal "is not of an overwhelming scale," CGS International analyst Kyunga Lee told Barron's. But he pointed to a separate X post in which Musk said that "the $16.5B number is just the bare minimum. Actual output is likely to be several times higher." This might mean that the deal could extend to chips for Musk's other companies, as well as Samsung memory.

For Samsung's chipmaking, the deal is an opportunity to prove that the woes of the past few years are in the rearview mirror. While formerly competitive with Taiwan Semi's technology, Samsung lost ground year after year, and flagship customers like Qualcomm fled. Though Samsung doesn't break out chip manufacturing in its financial reporting, it said that first-quarter results were "weak on sluggish seasonal mobile demand, inventory adjustments, and stagnant fab [factory] utilization" in its earnings presentation.

Charges for inventory and underutilization are some of the biggest financial issues for all manufacturing businesses, and indicate that demand has been weak.

Musk is taking a risk. Samsung and Tesla are hoping that the new manufacturing process in Taylor will bring the chip company back to competitiveness with Taiwan Semi. Musk said that he will personally help Samsung build its production line to aid with efficiency and to "accelerate the pace of progress."

Musk likes to have control of every aspect of his supply chain. Being a part of the Texas facility's construction has its own benefits that balance the risk Musk is shouldering. However, the challenges in chipmaking are unlike the ones Musk has previously faced with car and rocket manufacturing. He will have to learn quickly.

If Musk is set on moving chip production to the U.S., then the Samsung factory may hold other advantages over Taiwan Semi. Samsung is bringing its most advanced manufacturing to Texas, while Taiwan Semi's factory in Arizona uses its previous generation, and that may mean Taiwan Semi's technical advantage is erased in U.S. production.

Moreover, Advanced Micro Devices CEO Lisa Su, a Taiwan Semi customer, said last week that Arizona manufacturing would cost 5% to 20% more than the Taiwanese equivalent because of higher manufacturing expenses in the U.S., which may come to include new tariffs on materials later this year. A cost advantage over Taiwan Semi's Arizona facility may have also figured into Musk's decision to go with Samsung.

Musk needs to keep advancing these chips if he hopes to deliver on his longstanding promise to make Tesla vehicles that don't require a driver's attention while driving. In 2016 and 2019, Musk claimed that all Tesla vehicles being sold at those times already had powerful enough computing to run a self-driving car. These assurances turned out to be untrue, and Tesla has had to keep putting in new generations of chips to get self-driving over the finish line.

Musk is banking on Samsung to help Tesla do just that.

Write to Adam Levine at adam.levine@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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