As Chip Stocks Sell Off, This Is the Flight-to-Safety Play I Would Choose

Conditions for just about every stock related to artificial intelligence (AI) have become volatile in the last few trading sessions. As AI infrastructure capital expenditures mount and interest rates rise, such stocks appear less attractive to investors.

Such conditions suggest that a flight to safety may be worth considering. Among semiconductor stocks, Taiwan Semiconductor (TSMC) (NYSE: TSM) looks increasingly like a prudent choice, and here's why.

Image source: Getty Images.

TSMC as a safety play

We may be in the midst of a sell-off in semiconductor stocks, but you wouldn't know it from the earnings report TSMC delivered on Oct. 15.

In the third quarter, its revenue increased by 51% year over year to almost $47 billion. Since its costs and expenses grew at a slower pace, its quarterly net income rose by 69% to nearly $24 billion.

Other than chip manufacturing equipment maker ASML, TSMC arguably has the most privileged position in the AI hardware industry. Its fabs control nearly 73% of the third-party chip manufacturing market, according to TrendForce, and the company is also the dominant force in advanced chip production.

Despite that news, TSMC stock still sold off following the Q3 report. High capex among hyperscalers and rising interest rates have called into question whether the AI data center expansion can continue at its current pace.

Admittedly, an AI bust is possible, and the sector's growth might slow or possibly even turn negative for a time. However, just like the internet survived the dot-com bust, AI will likely endure.

As such, the industry will continue to need large quantities of the chips manufactured by TSMC. Key clients like Nvidia, Broadcom, and others will continue developing more advanced chips and will need TSMC for manufacturing.

With AI stocks seemingly in free fall at the moment, making all-in purchases is probably not wise. Nonetheless, now would arguably be a good time to begin dollar-cost averaging into TSMC stock. Even with the recent sell-off, it is up by about 40% over the past year.

Moreover, despite all the growth, TSMC stock trades at around 30 times earnings. Although the company has begun to produce more chips at U.S.-based foundries, the geopolitical risks associated with China's interest in absorbing Taiwan continue to weigh somewhat on its valuation.

However, the company's earnings multiple is low considering its rapid profit growth, and given that China is also dependent on TSMC's foundries, it is unlikely to do anything that could disrupt the chip supply chain.

Consider TSMC stock

As investing in the AI industry becomes uncertain, TSMC is well positioned to provide safety and growth.

To be sure, an industry slowdown would likely affect the company, and it operates in a more dangerous part of the world.

Nonetheless, AI is likely here to stay, meaning any AI bust would probably be temporary. Also, even if AI activity slows, TSMC's main clients are going to keep innovating, meaning the company will almost certainly continue earning revenue from AI.

Thus, even amid geopolitical uncertainty, it is likely a top AI chip stock to buy, and one that will help protect and grow investor wealth over time.

Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML, Broadcom, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.