Although artificial intelligence (AI) is far from new, it has taken the world by storm and made many advancements over the past few years. And with these advancements, you can make the case that Nvidia (NVDA +2.81%) has been the biggest beneficiary. Its stock price might not have increased the most, but its business has surely exploded.
Nvidia designs many of the AI chips that are used in data centers and for training AI models. However, another AI chip company has solidified its position as indispensable in the AI pipeline: Taiwan Semiconductor Manufacturing Company (TSM +1.11%) (TSMC). If you're looking for the best AI stock to invest in right now, TSMC should be your go-to.
Image source: TSMC.
Tech as we know it today suffers without TSMC
While companies like Nvidia and other big tech companies design the specific chips they need for their products, they don't actually manufacture them. Manufacturing chips requires significant capital, equipment, and specialized engineering talent, so in most cases, it's not worth it for these companies to make the investments. Instead, they rely on TSMC to bring these chips to life.
There's no doubt that TSMC is the leading chip manufacturer in terms of effectiveness, scale, and yield (the percentage of chips that work as intended). No other company comes particularly close, which is why major tech companies rely so heavily on TSMC.
Not only has this worked well for TSMC's revenue, but its near-monopoly has also given it pricing power that has boosted its profitability, especially in the past two years, when AI chips became a larger part of its business.
TSM Revenue (Quarterly) data by YCharts.
Nvidia became a hot AI company (and the world's most valuable public company) because of the graphics processing units (GPUs) it produces. However, I'd rather go with TSMC right now because without it, Nvidia's business would noticeably suffer.
Strengthening its competitive advantage
One of the major problems facing the AI revolution we're witnessing is the amount of power consumption that goes into data centers and training AI models. Some sources estimate that a single ChatGPT query could use 10 times as much power as a Google (GOOG +3.62%) search. And the amount of power required to train new AI models could be as high as what it takes to power thousands of homes in a year.
One way TSMC is expected to help this issue is through its new 2-nanometer (2nm) chip that's expected to be available in 2026. According to TSMC, the new 2nm chip could use 25% to 30% less power than its 3nm chip at the same speed. This isn't a solution to the power problem, but with TSMC's chips being so prevalent in data centers, it will surely help a bit.
TSMC is already the go-to for advanced AI chips, but if the company is producing more powerful and energy-efficient chips, companies investing in data centers and AI infrastructure will likely continue to choose TSMC because it saves them money in long-term energy costs. This is one effective way to strengthen its already strong competitive advantage.
NYSE: TSM
Key Data Points
A well-rounded business built to last
Although advanced AI chips have become a large part of TSMC's business, it's far from the company's only successful segment. TSMC manufactures chips for smartphones, laptops, tablets, TVs, cars, and dozens of other tech products. Even if the AI hype slows down (and eventually it will), TSMC's business is built to continue being successful.
This isn't to say Nvidia is only successful because of AI, but its business would undoubtedly take a major hit if demand for AI chips slowed or TSMC faced production issues. Without TSMC, the whole tech ecosystem would take a step back. Without Nvidia, the AI world would take a step back, but plenty of other areas of tech would operate without missing a beat.
TSMC is a stock you can comfortably hold for the long term.
