Top Choice for Artificial Intelligence Investment at Present (Spoiler Alert: It's Not Nvidia)
There's been plenty of chatter about Nvidia (NVDA -2.25%) recently. This company, renowned for creating high-end computer chips driving the artificial intelligence (AI) revolution, now boasts a staggering market cap of $3.48 trillion. That's right, a trillion with a 'T'. Nvidia now reigns as the largest company globally, showing no signs of slowing down. Over the past 5 years, revenue has skyrocketed by an incredible 782%.
However, investing in Nvidia today might not be the safest bet for investors. With the stock soaring and its forward P/E ratio hovering around 50, Nvidia shares appear to be fairly risky. Instead, those interested in capitalizing on the AI boom should consider Taiwan Semiconductor Manufacturing (TSM 4.98%) as an alternative.
Nvidia's primary semiconductor provider
Nvidia specializes in creating advanced computer chips for AI data centers. While they design these chips using software, their production is outsourced to other manufacturers. Taiwan Semiconductor Manufacturing, or TSMC, is the leading manufacturer of Nvidia chips, as well as those for other tech giants like Apple.
When it comes to cutting-edge computer chips, TSMC is now the only mass producer in the world at present. Nor can competitors like Intel or Samsung replicate TSMC's achievements just yet. TSMC's advanced semiconductor nodes – 5 nanometers and 3 nanometers – contribute more than half of its overall revenue.
TSMC has now become a colossus and even surpassed a $1 trillion market cap, though its shares have lately slid back to a mere $816 billion worth. During the previous 12 months, its revenue stood at $83.9 billion, with $36 billion in operating income. Both of these figures have been consistently increasing over the past decade due to TSMC's expanding dominance in the growing advanced semiconductor market.
Expanding its lead, international diversification
TSMC's management team has no intention of resting on their laurels. They plan to introduce their 2-nanometer node by 2025 to maintain their edge in advanced semiconductors. This means that for Nvidia to continue producing cutting-edge computer chips, it will need to rely on TSMC for manufacturing. Essentially, TSMC now holds a near-monopoly in advanced semiconductors, benefiting from unmatched pricing power.
Investors have raised concerns over TSMC's dependence on Taiwan in light of geopolitical tensions with China. However, TSMC is actively diversifying its supply chain by investing in facilities in the US, Mexico, Europe, and Japan. These factories are scheduled to open within the next few years, which should contribute to TSMC's revenue growth and help alleviate the geopolitical risk related to Taiwan.
A promising investment option
Unlike Nvidia, TSMC's shares trade at a reasonable P/E ratio of 30, which is almost identical to the S&P 500 index average right now (P/E of 30.4). Despite this, the company has significant growth potential over the next few years and decades.
The global market's insatiable appetite for advanced computer chips, particularly from tech companies, will remain unquenchable. Moreover, these companies are increasing their investments in computer chips and data centers, leading to increased demand for TSMC's products. With its monopoly position, revenue should continue to grow for the foreseeable future.
I believe TSMC will see rapid earnings growth over the next decade and potentially become one of the world's largest companies by market cap. Its current market cap is below $1 trillion, making it an attractive investment opportunity for AI investors today.
Investors looking to capitalize on the AI boom beyond Nvidia might want to consider TSMC as an alternative. Despite its current market cap of around $816 billion, TSMC's revenue and operating income have been consistently increasing due to its dominance in the advanced semiconductor market.
Given TSMC's reasonable P/E ratio of 30, which is similar to the S&P 500 index average, and its significant growth potential, the company could be an attractive investment opportunity for those interested in the AI sector.
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