Signs of the new AI boom are suddenly everywhere again.
AI stocks are soaring again this year as recent results from companies like Nvidia (NVDA 6.18%) and Super Micro Computer have blown past analyst estimates as cloud infrastructure companies and AI start-ups dramatically ramp up spending on AI hardware. The fervor for AI stocks has gotten so heated that even stocks that Nvidia has invested in, like Soundhound AI, have surged when the news of Nvidia's stake broke.
Those soaring stock prices have led some to fear that an AI bubble is forming. Wharton professor Jeremy Siegel said that a speculative bubble could be starting in stocks like Nvidia, and other respected investors like Jeremy Grantham and Jeffery Gundlach have made similar proclamations.
However, if you're questioning the magnitude and sustainability of the current wave of demand for AI infrastructure, this quote from Taiwan Semiconductor Manufacturing (TSM 1.26%) founder Morris Chang should help convince you otherwise.
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Fabs and fabs and fabs
At a recent conference in Japan, Chang described the demand his company is seeing from customers for AI computing power, saying: "They're not talking about tens of thousands of wafers. They are talking about fabs, [saying] 'We need so many fabs. We need three fabs, five fabs, 10 fabs.' Well, I can hardly believe that one."
The report, which was originally in Nikkei, said that Chang also said he believed demand was somewhere between tens of thousands of wafers and 10 fabs.
If you're unfamiliar with Taiwan Semiconductor, or TSMC, you should know that it's the world's biggest contract manufacturer of semiconductors with more than 50% market share, and it has about 90% market share of advanced contract chip manufacturing, which has become even more in demand in the AI era. Taiwan Semi handles production for companies including Apple, Nvidia, Broadcom, AMD, and many others as most chip designers now outsource their manufacturing to foundries like Taiwan Semi.
Given its tremendous market power, it's worth paying attention when its founder makes statements like the aforementioned one. Those sentiments also echo ones from other tech titans, including Oracle co-founder and CTO Larry Ellison, who has said that generative AI may be the most important new technology ever and said demand for AI computing power from Oracle was "over the moon."
The meta picks-and-shovels AI play
The biggest winners in the AI boom so far are the picks-and-shovels plays like Nvidia. These are the companies supplying the key infrastructure needed to run AI applications and high-powered models like ChatGPT.
In many ways, this development is reminiscent of the early days of the internet and the dot-com boom, when the biggest winners were companies such as America Online and Netscape, which offered access to the internet and were the key building blocks of that era. Huge success stories such has Amazon, Alphabet, and Meta Platforms would come later.
Taking that thinking one step further presents Taiwan Semi as something of a meta picks-and-shovels option in the AI boom, as it's as vital to the AI chipmakers like Nvidia as Nvidia is to the companies that need its GPUs and accelerators. That means that TSMC's competitive advantages are likely to expand as demand for AI chips builds.
The enormous demand that Taiwan Semi is seeing for new fabs won't be easy to fill. For example, building a state-of-the-art 3-nanometer fab, such as the ones in demand for AI chips, costs an estimated $20 billion, and plans for both TSMC and Intel to build new plants in the U.S. have run into snags. This shows that there are logistical and regulatory barriers standing in the way of expanding chip manufacturing capacity.
Image source: Getty Images.
This could be the easiest AI stock to own
As demand for AI chip manufacturing grows, TSMC occupies an increasingly enviable position, as it is by far the biggest manufacturing partner for industry suppliers like Nvidia. In some ways, it's the only game in town.
TSMC's dominant market share at a crucial position in the AI supply chain also gives it significant market power, and it should be a winner no matter what happens in the AI revolution. The company only needs demand for chips to grow, and it's clear now that running generative AI applications comes with massive computing needs.
TSMC won't have the kind of triple-digit breakout growth that Nvidia has experienced, as most of its demand is still for non-AI chips. But TSMC seems almost guaranteed to be a winner as AI demand grows, and the stock deserves a place in nearly any AI stock portfolio.
Shares of TSMC have already gained 29% this year after climbing 39% last year, and it's well positioned for further gains as it trades at a reasonable valuation and has a huge profit margin.
As that quote from Chang shows, TSMC's services are in demand as never before. If you're looking for an AI stock to buy right now, Taiwan Semi is a great place to start.
