Forget Nvidia: Buy This Magnificent Artificial Intelligence (AI) Stock Instead

There is no denying it. Nvidia is so far the centerpiece of the artificial intelligence (AI) revolution. Its technology is used in the vast majority of AI platforms around the world, simply because it offers the most computing power. And Nvidia shares have moved accordingly since the movement began in earnest early last year.

As with any industry, time is a driver of change in AI. Nvidia is no longer the biggest opportunity in the market. This stock is moving towards Semiconductor manufacturing company in Taiwan (TSM 1.56%)which is arguably better positioned to capitalize on the next chapter in the AI ​​growth story.

Taiwan Semiconductor is behind the scenes… all

Nvidia is not doomed. But it would be naive not to recognize that most of the easy money AI has made has already been made. The competition is heating up. Intel And Advanced Micro Devices Companies are stepping up their efforts. The price war is underway.

There’s an often overlooked but important detail about the AI ​​hardware industry that you need to understand, though. That’s because chipmakers like Nvidia and AMD, mentioned above, don’t typically make their own chips. They typically outsource that work to third-party “contract” manufacturers who can build that silicon to the specifications of its designers.

Taiwan Semiconductor is one such contract manufacturer. It is indeed the biggest name in the industry. It is estimated to manufacture about two-thirds of the world’s semiconductors and associated circuits, and an even larger share if you consider just the global market for high-performance chips.

This might help drive the point home: Advanced Micro Devices and Nvidia are both confirmed customers of Taiwan Semiconductor. Intel continues to invest in building its own foundries, although it has entered into a development partnership with Taiwan Semiconductor to do so.

Connect the dots. Taiwan Semiconductor may well be the technological heart and soul of the global AI revolution.

And it’s not just data centers. Over time, AI computational work is moving to end users, and particularly to end users’ mobile phones. AppleApple’s newest processor, the A17 found in the iPhone 15 Pro and Pro Max, is capable of handling generative AI tasks on the device itself rather than in the cloud, where most generative AI work is currently done.

Apple isn’t alone in exploring embedded artificial intelligence. QualcommThe new high-performance Snapdragon 8 (Gen 3) mobile processors can handle the same type of load on mobile devices.

Apple and Qualcomm also use Taiwan Semiconductor’s chip manufacturing services.

Still many opportunities to come

Taiwan Semiconductor Manufacturing does not make all the chips used by the aforementioned companies, nor all the AI ​​chips the world currently uses or will use in the future. In fact, it is likely to lose market share as other players increase their capacity to produce this type of silicon. Intel in particular shows the potential to become a serious competitor to Taiwan Semiconductor.

There is still more growth potential, however, despite the prospect of declining market share. According to market research firm Skyquest, the AI ​​hardware market is expected to grow at a compound annual rate of 15.5% through 2031, while the mobile AI market is expected to grow at a compound annual rate of nearly 27% over the same period. With that in mind, the analyst community estimates that Taiwan Semiconductor’s revenue will nearly double between last year and 2026 as the AI ​​chipmaking industry solidifies.

So why has this stock fallen more than 20% since its July peak (while many other AI names have seen similar declines)? It has more to do with the market environment than anything else. Investors finally began to realize last month that a few too many stocks had reached valuations that were too high. Friday’s disappointing July jobs report didn’t help either, suggesting continued economic weakness on the horizon.

And maybe it is.

But let’s not lose sight of reality. Even in a tough economic environment, most chipmakers will still need new silicon. And most of them still can’t produce much (if any) of it themselves. They’ll still need Taiwan Semiconductor to do it for them. In fact, the weak economy could even dampen capital spending on new foundries, making a proven, profitable foundry like Taiwan Semiconductor Manufacturing all the more important for the biggest players in the AI ​​space.

James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Nvidia, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 Intel calls and short August 2024 $35 Intel calls. The Motley Fool has a disclosure policy.