It may seem that every investor is chasing AI. Artificial intelligence -- particularly generative AI that is used for everything from personalized recommendations to video generation and scientific research -- has been a hot topic in recent years, and that will surely continue. Research suggests that the global generative AI market will be $67 billion this year, increasing to $442 billion by 2031. That's a dynamic compound annual growth rate (CAGR) of 37%.
While investing in Nvidia (NVDA +2.89%) has been a popular way for investors to profit in the AI boom, there's another name that I think is an even better opportunity.
The powerhouse behind AI
There's going to be some powerful competition in the coming years for designing the graphic processing units, or GPUs, that are necessary to power large language models (LLMs) and run generative AI programs. Nvidia is certainly in the driver's seat with as much as 90% of the market share. And there are companies, like Advanced Micro Devices and Intel, that are trying to make inroads. Amazon, Alphabet, Microsoft and Meta Platforms are also working to develop their own specialized chips that would cut into Nvidia's dominance.
Image source: TSMC.
But there's one name that is already an indispensable partner to Nvidia and any other company working to design GPUs. Taiwan Semiconductor Manufacturing (TSM +0.52%) is a chip foundry -- it manufactures the chips that Nvidia and other companies design, as companies like Nvidia don't have the facilities to manufacture GPUs. As the world's biggest chip foundry, Taiwan Semi is in the catbird seat because nearly all of the big tech companies need it to make their GPUs.
Taiwan Semi seemingly works with everyone, and the company produced nearly 11,900 different products with 288 separate processes in 2024. It is involved in roughly 85% of global semiconductor start-up product prototypes.
Taiwan Semiconductor is a bargain
With this kind of competitive moat, you might think that investors could only buy TSMC stock at a premium. But you'd be wrong. Taiwan Semiconductor stock can be had for a trailing price-to-earnings ratio of around 28, and a forward P/E of just 23. Both of those are much better than Nvidia today.
NVDA PE Ratio data by YCharts
That's an outstanding price for a company that brought in revenue in May of $10.85 billion, up 40% from a year ago. Through May 31, TSMC's revenue reached $51 billion, up nearly 43% from 2024.
Another thing I love about Taiwan Semiconductor is that it is able to forecast its revenue fairly accurately, as chip designers need to place their orders far in advance. For example, TSMC guided for first-quarter revenue between $25 billion and $25.8 billion, and it came in at $25.53 billion. That gave it gross margins of 58.8% -- a great number -- and an operating margin of 48.5%.
That's why investors should feel confident in TSMC's forecast for a 20% CAGR in overall revenue over the next five years -- and 45% CAGR for revenue in its AI-related businesses.
More growth is in the cards
Taiwan Semi's healthy operating margin gives it plenty of resources, including $31.4 billion in free cash flow over the last 12 months. And it's putting all that money to good use. After previously announcing a $65 billion investment to build manufacturing facilities in Arizona, TSMC announced an expansion and an additional $100 billion in U.S. spending to build three new fabrication plants, two packaging facilities and a research and design center. https://pr.tsmc.com/english/news/3210
NYSE: TSM
Key Data Points
While bringing some foundry operations to the U.S. should help shield TSMC from tariff issues, the additional expansion will also allow Taiwan Semi to maintain its position as the world's leading chip foundry -- and ensure that the stock will continue to bring in profits for shareholders for years.
Taiwan Semi stock is only trading about 5% below its all-time high and is up about 8% so far in 2025 as of Tuesday's market close. But the future of this stock is too good to overlook.
Essentially, generative AI doesn't happen without Taiwan Semi. It's that important. And no matter if Nvidia maintains its superiority or if other companies eat into Nvidia's dominant market share, TSMC will continue to bring in the profits. That's why Taiwan Semiconductor is a great stock to buy today.
