When investors look at artificial intelligence (AI) stocks, the biggest challenge is choosing which avenue is the best bet -- because nearly everywhere you look, there are multiple names from which to choose.
Want to invest in AI chips? Nvidia is the biggest player, but it's challenged by Advanced Micro Devices and Broadcom. Hyperscalers like Amazon and Alphabet are designing their own chips, with an eye on reducing their dependence on outside companies. And there's a new stock, Cerebras Systems, with a successful IPO, making chips more powerful than Nvidia's. It's already making some waves.
Maybe cloud computing and AI infrastructure are better options? Good luck there, as Amazon, Microsoft, and Alphabet's Google Cloud are battling for supremacy. Want to invest in data centers? Your choices include Nebius Group, Iren, CoreWeave, and data center real estate investment trusts such as Digital Realty Trust and Equinix.
Get the picture? There are choices everywhere.
So if you really want the closest thing you can find to a sure thing in the AI space, the best bet you can make is on a company that has such a massive advantage that the top companies -- many of which we've already talked about here -- have no choice but to be customers.
That leads us directly to Taiwan Semiconductor Manufacturing (TSM +4.69%). The math, in this case, doesn't lie.
NYSE: TSM
Key Data Points
Taiwan Semiconductor has an incredible growth story
Taiwan Semiconductor, also known as TSMC, doesn't make its own chips. But it's a foundry -- the largest foundry in the world that makes chips designed by other companies. And the growth of AI has had a dramatic impact on TSMC's revenue -- and how it gets its money. Since 2020, the percentage of revenue from high-performance computing chips has skyrocketed, as have TSMC's revenue and profitability.
|
Period |
Smartphone Revenue |
High-Performance Computing Revenue |
Internet of Things Revenue |
Automotive Revenue |
Digital Consumer Electronics Revenue |
Other Revenue |
|---|---|---|---|---|---|---|
|
Q1 2020 |
49% |
30% |
9% |
4% |
5% |
3% |
|
Q1 2023 |
38% |
43% |
8% |
6% |
2% |
3% |
|
Q1 2026 |
26% |
61% |
6% |
4% |
1% |
2% |
Data source: Taiwan Semiconductor Manufacturing.
In the first quarter, TSMC generated $35.9 billion in revenue with a whopping 50.5% net profit margin. The company reported earnings per share (EPS) of 22.08 New Taiwan dollars ($0.70). That's a vast jump from just three years ago, when TSMC had $19.6 billion in Q1 revenue and EPS of $0.29.
And even more tellingly, TSMC's improving technology is driving sales. In the most recent quarter, 61% of its revenue came from making 3-nanometer and 5nm chips, which have smaller transistors than 7nm and larger chips, meaning they can hold more components and are more powerful. In the first quarter of 2023, 67% of TSMC's revenue came from making chips 7nm and larger.
Image source: The Motley Fool.
TSMC's incredible competitive moat
TSMC has an estimated 70% of the total market's chip manufacturing revenue and counts Nvidia, Intel, Broadcom, Qualcomm, Apple, and other big names as its customers. Intel is a potential competitor, but it has yet to secure an anchor company for its fledgling foundry business.
That leaves TSMC as the best -- and for some chipmakers only -- viable option. TSMC stock is up 33% so far this year, and all indications are that it will continue to move higher as the growth of AI fuels its business.
