Here's My Top Low-Risk, High-Potential-Reward Stock That's Thriving in the Artificial Intelligence (AI) Boom

It can be a challenge to find stocks with high growth potential that are also low-risk investments. However, I've identified one that truly has little downside: Taiwan Semiconductor (NYSE: TSM). It's one of the companies that is best positioned to take advantage of booming demand for artificial intelligence, as well as future demand from other tech products that could emerge as AI is rolled out more widely.

I think this makes it one of the best stocks to buy, and now would be a great time to do so.

Image source: The Motley Fool.

Taiwan Semiconductor is an easy investment

While companies like Nvidia (NASDAQ: NVDA) and AMD (NASDAQ: AMD) are associated with cutting-edge processors, the reality is that they don't manufacture these devices; they design them. At the heart of these units are logic chips, and the world's largest logic chip manufacturer by far is Taiwan Semiconductor.

No other company can come close to it for manufacturing capacity, nor for its ability to reliably produce chips using the most advanced process nodes, which is why it held a 72.5% revenue share in the chip fabrication market in Q2. The reality is that Taiwan Semiconductor cannot be replaced, and the chips it churns out are vital to the proliferation of AI technology.

But the AI trend isn't yet near its peak, either. A host of technologies will be driven by AI, such as robotics, self-driving cars, and AI-powered devices. All of these will need processors of various kinds, and TSMC will likely be the company to fabricate most of them.

An investment in Taiwan Semiconductor is a bet that we'll need more advanced chips in greater quantities in the future, and that's about as safe a bet as you can make. While the road may not be a completely smooth ride, I still think that TSMC is one of the best long-term investments any investor can make.

Taiwan Semiconductor has immediate upside

In Q2, TSMC announced that it would invest another $100 billion into its Arizona facilities, bringing its total capex plan for that campus to $265 billion. Management wouldn't be making a massive investment like that if it didn't see higher chip demand coming, which bodes well for the long-term demand wave of AI.

One of Taiwan Semiconductor's largest clients, Nvidia, has made some bold projections for AI spending. Next year, management expects the AI hyperscalers to log a total of $1.3 trillion in capital expenditures, up from nearly $800 billion this year. However, by 2030, it expects global data center capital expenditures to rise to between $3 trillion and $4 trillion. A large slice of that spending will go toward chips coming from TSMC's foundries.

TSMC is also positioned to benefit from rising competition in the AI accelerator space. Nvidia's GPUs may not always be the top-selling option in the market, as other chips such as Broadcom's (NASDAQ: AVGO) application-specific integrated circuits are beginning to take significant market share. But regardless of which designers' processors are being used, odds are the chips will originate from Taiwan Semiconductor, as it occupies a neutral position in the industry.

An investor might expect to have to pay a massive premium to own TSMC's stock, but at 26 times forward earnings and 20 times next year's expected earnings, it's actually reasonably priced.

TSM PE Ratio (Forward) data by YCharts.

I think all of this combines to make Taiwan Semiconductor one of the best investment options available today, as it is positioned to benefit from AI demand in general, regardless of which specific companies' large language models, chips, or software become the next leaders in their niches.

Keithen Drury has positions in Broadcom, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Advanced Micro Devices, Broadcom, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.