The best artificial intelligence (AI) stock to buy right now is an incredibly hot topic. Some may argue that it's Nvidia; others may prefer Microsoft. While there are merits to both arguments, I prefer a different AI company.
Like most AI businesses, my top pick isn't 100% focused on AI; it's all part of a larger strategy. Furthermore, without Taiwan Semiconductor Manufacturing (TSM +5.96%), none of the AI technologies would be possible. Luckily for investors, TSMC just went on sale, and now could be the perfect time to add some shares to your portfolio.
Taiwan Semiconductor is a vital partner for many companies
Taiwan Semiconductor is the leading contract chip manufacturer, which means it's a chip fabrication shop. Its clients (among them Nvidia, Microsoft, Apple, AMD, and practically any other tech company you can think of) provide Taiwan Semi with a design, and then it fabricates the chip. This is a vital partnership, as many tech companies lack the capital or experience to produce these chips.
Additionally, even for those who could replicate the innovative technologies that TSMC has produced, it'd be tough to catch up. Right now, its most innovative chip is of the 3 nanometer variety. However, the next chip generation is already in the works. Slated for late 2025 production, the 2nm chip is expected to be a game changer. Management projects a 10% to 15% speed improvement with the same power consumption, or a 25% to 30% power improvement at the same speed. This is a huge step forward for TSMC, as it's well documented how much power data centers powering AI consume. It would be a huge step forward for the industry if it could upgrade to a technology that reduces power intake by 25%.
But it's also doing great right now.
In the second quarter, TSMC's revenue rose 33% year over year (in U.S. dollars). According to management, this growth was led by strong AI and high-end smartphone demand. The quarter and outlook were so good that management raised full-year revenue to the mid-20% growth range for 2024. This is exactly what investors wanted to see, but the stock is down nearly 20% from its 2024 highs.
NYSE: TSM
Key Data Points
Part of this reaction was caused by former President Donald Trump's comments about Taiwan needing to pay for its own defense. Still, I think this represents a buying opportunity for a company that is one of the most important in the AI value chain.
Taiwan Semiconductor's stock recently went on sale
After the drop, the stock trades for around 24 times forward earnings.
TSM PE Ratio (Forward) data by YCharts
You could have picked up shares for much cheaper earlier this year, but that's in the past. Investors need to focus on what's in store. For the next three years, this is what the annual earnings-per-share (EPS) forecast looks like:
| Year | EPS Forecast |
|---|---|
| 2024 | $6.37 |
| 2025 | $8.12 |
| 2026 | $9.82 |
Data source: Nasdaq.
With strong growth ahead, I'm confident that TSMC will continue to be a fantastic AI stock to own.
While TSMC won't provide astounding revenue growth like Nvidia might, it is one of the world's most important companies, and its chips are vital to every part of technology. This market position will support growth for years to come, and I think it's one of the best stocks to buy now and just put away in your portfolio.
