Here's Why Taiwan Semiconductor (TSM) May Be the Smartest AI Infrastructure Buy Right Now
Key Points
Leading tech companies use TSMC to produce their chips.
High margins and market share reflect a wide competitive moat.
TSMC is reportedly raising prices for its process nodes, reinforcing its advantages.
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There are many ways to invest in artificial intelligence (AI), but overall, there is no business better positioned to compete than Taiwan Semiconductor Manufacturing (NYSE: TSM). It produces chips for Nvidia, Apple, and other leading tech companies. It's a wide-moat business that provides broad exposure to the AI chip market with one stock, making it the smartest way to invest in AI infrastructure.
The stock's price has climbed 110% over the past year. In the first quarter, revenue surged 40% year over year, driven by insatiable demand for AI chips powering advanced computing systems.
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It's not easy to replicate what TSMC does. It takes at least a few years to complete the production process, including testing and qualifying a new leading-edge process node. This makes it costly for customers to switch suppliers once a chip blueprint has been sent to TSMC for production.
TSMC controls over 70% of the global foundry market, according to Counterpoint. This dominant lead is reflected in its high margins. Over the last year, TSMC's net profit margin was 47%.
There is growing competition from other foundries, including Intel and Samsung. Still, recent reports indicate that TSMC is raising prices for its process nodes amid strong demand and higher costs of memory components used in chipmaking. This reinforces its wide competitive moat in the industry. The stock trades at about 30 times this year's earnings estimate, which isn't cheap but reasonable, and analysts project 31% annualized earnings growth over the next several years.
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John Ballard has positions in Nvidia. The Motley Fool has positions in and recommends Apple, Intel, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
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