Identifying the single best AI stock to buy and hold is incredibly difficult, and everyone has their own opinion on the subject. There are several options, ranging from hardware providers to hyperscalers to software applications, but I think investors should focus on where the money is flowing.
Right now, the biggest area where money is being spent is in building out the AI computing footprint. This makes hardware one of the best areas to invest in, and I've pinpointed what I think the single best AI stock investment is right now. While an argument could be made for Nvidia (NVDA 0.04%) or one of the rising competitors, I think there is no better option than Taiwan Semiconductor Manufacturing (TSM 0.92%).
TSMC -- as it's also known -- is in the driver's seat for the entire AI computing industry, and is incredibly important for every computing equipment provider because they can't manufacture their own chips. That's where Taiwan Semiconductor comes in, and that makes it a must-own stock in the AI arms race.
AI isn't the same without Taiwan Semiconductor
TSMC is the world's largest chip foundry by revenue. This stems from its role as a neutral chip supplier, as clients aren't worried about their designs getting reverse-engineered and launched under the foundry's name.
Taiwan Semiconductor's clients range from major computing players like Nvidia, Advanced Micro Devices (AMD +0.68%), and Broadcom (AVGO 1.71%) to consumer device companies like Apple (AAPL 0.31%). If there's a high-tech device that you use, chances are it has chips originating from Taiwan Semiconductor in it.
Because of that, Taiwan Semiconductor could easily be named one of the (if not the) most important companies in the world. None of today's artificial intelligence technology would look the same without Taiwan Semiconductor, and that's why I think it's one of the best options to invest in right now.
NYSE: TSM
Key Data Points
Taiwan Semiconductor is also solving one of AI's biggest problems: power consumption. It's no secret that AI data centers are power hungry and are driving consumer electricity prices through the roof in some areas of the country. Additionally, the power grid will start to become a huge issue in a few years as more and more data centers come online.
To solve this energy crisis, many companies are considering building nuclear power plants or other energy-generating technologies to increase energy capacity.
However, Taiwan Semiconductor is tackling this problem from a different angle. Taiwan Semiconductor's new 2nm (nanometer) chip node is entering production currently, and has massive benefits over previous generations. When configured to run at the same processing speeds as 3nm chips, 2nm chips consume 25% to 30% less power. That's a massive improvement and would alleviate part of the energy crisis. While it isn't a solution by itself, it's a part of a larger picture to ensure there's enough electricity available to power AI aspirations.
These chips aren't a free upgrade and will create further increased sales for Taiwan Semiconductor. With that in mind, how much growth can investors expect from Taiwan Semiconductor's stock over the next few years?
Taiwan Semiconductor has already delivered excellent growth
During the third quarter, Taiwan Semiconductor's revenue rose 41% year over year in U.S. dollars, exceeding expectations. But that's in the past. What can investors expect in the future?
Nvidia projects that global data center capital expenditure will total $600 billion this year, but rise to $3 trillion to $4 trillion by 2030. If we use the high end of that projection, that indicates a compound annual growth rate (CAGR) of 46%. However, Taiwan Semiconductor only derives 57% of its revenue from high-powered computing applications. Smartphones account for 30%, and the rest is split among a handful of other industries.
Smartphones aren't the growth engine they used to be, so this will hold back Taiwan Semiconductor's overall growth rate from the AI industry. Even if we project TSMC's revenue to rise at a 20% CAGR from now until 2030, that would indicate 148% revenue growth. Taiwan Semiconductor isn't valued at too much of a premium compared to its big tech peers (24 times 2026's earnings), so this growth should translate directly into stock growth if it can maintain its margins.
A 148% upside in five years is an incredible return, making it my top AI stock to buy now.
