With November here, investors can start thinking about how they want to position their portfolio for 2025. One trend that has arrived and stuck around is artificial intelligence (AI), so having a portion of your portfolio devoted to this generational shift is critical.
In this space, I like Taiwan Semiconductor (NYSE: TSM) and Meta Platforms (NASDAQ: META). However, that doesn't mean investors can ignore other parts of the market.
There are some screaming deals in some areas, and many companies have been ignored for years. These represent great values, and I think buying shares of a business like PayPal (NASDAQ: PYPL) is a great way to balance out the growth of AI with more traditional value investing.
The AI plays
Taiwan Semiconductor is the biggest chip manufacturer in the world. It makes chips for essentially all the cutting-edge tech companies, like Nvidia and AMD. AI is starting to become a massive part of its business and has grown much quicker than management projected.
In Q3, Taiwan Semiconductor gave guidance that AI-related chips would triple in revenue this year and account for a mid-teens percentage of its revenue. Just under a year ago, in its Q2 FY 2023 conference call, management said AI-related chips made up just 6% of their business and would grow to become a low-teen percentage of revenue after five years of growth.
Clearly, demand for AI chips is here, and management doesn't see the well drying up anytime soon. We're just scratching the surface of the computing power necessary to make serious progress in AI implementation. Taiwan Semiconductor is a company set to benefit from this boom. As a result, I think it's a great stock to buy right now.
Furthermore, it's not terribly expensive when you consider 2025 earnings. Taiwan Semi trades at 22.1 times 2025 earnings -- not a bad price for a dominant company.
One company heavily involved in the AI arms race is Meta Platforms, the parent company of social media sites like Instagram and Facebook. It derives a significant chunk of its revenue from advertising. This is a highly profitable business, and Meta uses the cash flows from this area to invest in other endeavors.
One of those is AI, which has some investors worried. Meta is known to spend a lot of money on projects that CEO and founder Mark Zuckerberg thinks are the future. Few of these investments have worked out (just look at the metaverse), but generative AI could be a different story (since there are actually practical applications). Meta has been warning investors for multiple quarters that they should "expect significant capital expenditures growth in 2025."
This is causing some to get out of the stock, which leaves investors with a great buying opportunity. Meta's Q3 was solid, with revenue rising 19% year over year and earnings per share (EPS) increasing 37% year over year, so it's clear the base business is doing great.
Meta trades for 24 times 2025 earnings, which isn't cheap, but it isn't a bad price to pay for one of the world's most dominant tech companies.
PayPal is a strong value play
PayPal isn't on the cutting edge of anything; it's just trying to stay relevant in a world of thousands of payment options. CEO Alex Chriss has been relentless in finding new use cases for its technology and driving efficiency improvements to keep the company from struggling.
He's been widely successful at that and has delivered significant transaction margin growth after years of shrinking. This has transformed PayPal into a company that can at least match market performance, as its earnings are expected to grow in the low to mid-teens for 2024.
Despite this, PayPal's stock trades for a dirt cheap valuation level.
PYPL PE Ratio (Forward 1y) data by YCharts
At 16 times 2025 earnings, PayPal is a dirt cheap stock, especially considering that the broader market, measured by the S&P 500 (SNPINDEX: ^GSPC), trades at 24 times forward earnings. Management also recognizes this and has been using essentially all of its free cash flow to repurchase shares. As a result, it has reduced its average shares by 7% over the past 12 months.
PayPal's growth may not be jaw-dropping like Taiwan Semiconductor's or Meta Platforms', but it is strong enough that, when its low valuation is factored in, it creates the opportunity for a market-crushing stock.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Keithen Drury has positions in Meta Platforms, PayPal, and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Advanced Micro Devices, Meta Platforms, Nvidia, PayPal, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: long January 2027 $42.50 calls on PayPal and short December 2024 $70 calls on PayPal. The Motley Fool has a disclosure policy.
