There's no question that Amazon (AMZN 3.43%) has been a tech dynamo for much of its history, and it has delivered monster returns to its long-term investors.
However, more recently, the company's results have been mixed. Yes, Amazon stock has nearly doubled over the past year, but that's only because it fell so far in the bear market of 2022. In fact, Amazon still hasn't eclipsed its peak from 2021, even as the S&P 500 and Nasdaq Composite are back to setting new all-time highs.
While Amazon's recent results have been solid, there are also signs that the company is losing its edge. Revenue growth at its cloud computing business, Amazon Web Services, has slowed substantially, down to 13% in the fourth quarter, well behind its two biggest rivals, Microsoft Azure and Alphabet's Google Cloud. Growth in its e-commerce business has slowed to a similar pace, and it's even been outpaced by Walmart.
Amazon also seems like it's gotten off to a slow start in the artificial intelligence (AI) race. It followed Alphabet in making a multibillion-dollar investment in Anthropic AI in September, though that move seemed designed to make up for its earlier lack of strategy.
Amazon is a member of the "Magnificent Seven," the group of the world's most valuable tech companies. Those seven contributed the largest portion of the overall market's share price growth last year. However, Amazon's greatest innovations could be behind it. CEO Andy Jassy seems to have pivoted from experimentation toward a focus on profitability, which could leave the company weaker over the long term. For example, its marketplace sellers are up in arms over a new set of fees that has prompted a Federal Trade Commission investigation.
One company on the cutting edge of technology that in my view would be a good candidate to replace Amazon in the Magnificent Seven is Taiwan Semiconductor Manufacturing Company (TSM 1.26%).
Image source: Getty Images.
Possibly the world's most important company
It's no exaggeration to call Taiwan Semiconductor Manufacturing -- aka TSMC -- the world's most important company. It's the world's largest chip manufacturer. It handles approximately 55% of contract chip manufacturing and 90% of the most advanced chips, and that share could go even higher.
TSMC is the company that tech giants like Apple, Nvidia, Broadcom, Advanced Micro Devices, and even Amazon turn to in order to manufacture their chips, giving it tremendous market power. Arguably, no other company would affect the world more if it ceased operations today.
TSMC's market power is also visible in its results. In the fourth quarter, the company generated $8.2 billion in operating income on $19.6 billion in revenue, giving it an operating margin of 42%, a clear demonstration of its pricing power.
TSMC is also vital for generative AI technology, as companies like Nvidia rely on it to produce the cutting-edge graphics processing units (GPUs) and other chips capable of powering and training generative AI applications like ChatGPT. Demand for those chips is vastly outstripping supply, which should drive profits even higher at TSMC.
There's a clear need to expand chip production, and TSMC has new foundries planned in the U.S. and other parts of the world. However, expansion in the U.S. is running into challenges for several companies, showing that it won't be easy to ramp up the production of chips, especially the most advanced ones.
Why TSMC should join the Magnificent Seven
TSMC isn't a U.S.-based company like the rest of the Magnificent Seven. Still, it is listed in the U.S. on the New York Stock Exchange. With a market cap of $721 billion as of March 11, it's now more valuable than Tesla, which means that it would qualify for a spot in the group based on its size.
However, the best reason to include TSMC in the Magnificent Seven is that it represents the future of technology. It's the dominant supplier of AI chips and other advanced processors and will almost certainly remain so.
The company has returned to revenue growth after the last cyclical downturn in the chip industry, and investors are recognizing its crucial position in the AI supply chain -- the stock is up 34% year to date.
TSMC looks like a good bet to outperform Amazon and other members of the Magnificent Seven over the rest of the year. It deserves a spot in the elite group of tech stocks.
