Individual investors should monitor the activities of some of the most successful investors. Billionaire hedge fund managers have access to more resources and information than individual investors, and following them is a great way to confirm decisions you've already made or generate ideas.
One billionaire I follow is Stanley Druckenmiller, who runs the Duquesne Family Office. Every quarter, funds with more than $100 million in holdings must report their holdings at the end of the quarter. Then that information is made available to the public 45 days later in a 13-F form. The latest round of those was released on May 15 and included some valuable information.
The Duquesne Family Office loaded up on my favorite way to invest in the artificial intelligence (AI) arms race: Taiwan Semiconductor (TSM -1.62%), also referred to as TSMC. I think this is a genius move by Druckenmiller.
Image source: Getty Images.
TSMC is a neutral AI play
The Duquesne Family Office didn't just buy some shares of TSMC; it loaded up. Prior to Q1, it owned just over 100,000 shares of the company. It has massively increased its position this quarter and now owns just shy of 600,000 shares. Its TSMC stake now makes up about 3.33% of its total holdings and is one of its 10 largest positions. So what makes it so bullish on Taiwan Semiconductor?
TSMC is the world's largest contract chip manufacturer, able to produce chips based on the unique designs of its customers. This is a mutually beneficial relationship, as this way clients don't need to maintain factories or spend resources on developing chip manufacturing technology, and TSMC doesn't need to design or market its chips.
Based on how TSMC is positioned, the company doesn't need a winning AI technology to win the AI arms race; it just needs its clients to spend heavily on the computing power that fuels it. An investment in TSMC is a bet that the world will use more computing power and more advanced chips over time. That's a no-brainer, which is why the company is at the top of my list for best AI stocks in which to invest.
Because of Taiwan Semiconductor's unique position of being a chip supplier to nearly every company involved in the AI arms race, it has unparalleled access to information about demand. Chip orders are placed years in advance, as evidenced by TSMC's Arizona factory already selling out production through 2027. So when management gives a projection, investors would be wise to listen.
TSMC's management believes that AI demand will be so strong that its AI-related revenue will grow at a 45% compounded annual growth rate (CAGR) over the next five years. Overall revenue should increase at nearly a 20% CAGR, providing outstanding growth for investors.
All of this information contributes to the Duquesne Family Office loading up on shares during Q1, but the last date at which it could have made this purchase was March 31, when the markets hadn't recovered from tariff-induced fears. So is it still a good buy now?
TSMC's stock is still cheaper than the broader market
Despite Taiwan Semiconductor's stock recovering in the past few weeks, it's still trading at a fairly attractive valuation.
TSM PE Ratio (Forward) data by YCharts
At less than 21 times forward earnings, TSMC trades at a discount to the broader market, as measured by the S&P 500 (^GSPC -0.12%), which trades for around 22.1 times forward earnings.
Although you can't buy TSMC stock for as little as you could just a few weeks ago, it's still cheaper than the broader market and is expected to grow its revenue much faster than the market rises (around 10% per year).
That's a recipe for a market-beating stock, which makes Taiwan Semiconductor a smart buy here.
