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Taiwan Semiconductor has made a lot of investors a ton of money over the past decade.
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Nvidia's (NVDA 0.03%) CEO, Jensen Huang, has transformed his company into the world's largest by identifying trends earlier than anyone else. This is how Nvidia captured a significant portion of the AI computing market, delivering substantial gains to its shareholders.
So, when Jensen Huang calls a company's stock a "very smart buy," investors should listen up.
What company was Huang talking about when he mentioned this? It's none other than a key Nvidia supplier, Taiwan Semiconductor (TSM 0.02%).
Image source: Getty Images.
During a visit to TSMC, Jensen Huang stated:
Well, first of all, I think TSMC is one of the greatest companies in the history of humanity, and anybody who wants to buy TSMC stock is a very smart person.
That's huge praise from the man who leads and founded the world's largest company. But is he right?
Taiwan Semiconductor, widely known as TSMC, is in a strong and unique position in the chip world. It's a semiconductor foundry that produces chips for companies like Nvidia that lack the in-house capabilities to do it themselves. This fosters a strong working relationship, as they each depend on one another. Nvidia isn't the only company that uses TSMC; others, such as AMD (AMD 0.03%) and Apple (AAPL +0.00%), do also.
This raises a key point about TSMC: It often produces chips for companies that are competing against each other. AMD and Nvidia are vying for supremacy in AI computing power, and Apple's iPhones are competing against Google's Pixel phones, which have just started using TSMC-made chips. With TSMC remaining neutral and acting only as a supplier to companies battling it out, it's in a position to capitalize on several key trends without needing to develop the winning product.
As long as TSMC can stay on top with the technology it offers, it will maintain its market leadership position.
By the end of the year, TSMC's next chip node, the 2nm (nanometer) chip, will be in production. This chip offers substantially better power consumption (25% to 30% improvement) compared to the 3nm variety when configured at the same speed. While concern grows about the power consumption of AI data centers, this innovation is expected to be a massive hit among tech companies. Additionally, TSMC has 1.6nm and 1.4nm designs in the pipeline, which are expected to offer similar power consumption improvements.
Clearly, TSMC is one of the world's most innovative companies, and the successes of many tech giants can be traced back to it. But is it a smart buy now?
Taiwan Semiconductor has put up jaw-dropping growth in recent quarters, with Q2's revenue rising 44% year over year in U.S. dollars. That makes it one of the fastest-growing big tech stocks, trailing only Nvidia. Despite that, the market hasn't placed a premium valuation on TSMC's stock, as it only trades for 24 times forward earnings.
TSM PE Ratio (Forward) data by YCharts
Considering that the S&P 500 (SNPINDEX: ^GSPC) trades for 23.7 times forward earnings, this indicates TSMC is valued about the same as an average S&P 500 stock. With its key position in the AI arms race, as well as its growth, I think this is a huge bargain. Therefore, Jensen Huang's statement about how smart people are buying TSMC stock is absolutely correct.
I think Taiwan Semiconductor is one of the top AI stocks to buy now, as the AI arms race spending spree is still going strong.