Not Intel. Not Nvidia. This Chip Giant Holds an Unbreakable Moat in Next-Gen Data Centers.

Some investors look at moats and assume they're strong, but when they truly break them down, investors realize these moats weren't as good as they thought. One popular stock that investors cite for its strong moat is Nvidia (NASDAQ: NVDA). However, when you break it down, it's not nearly as strong as that of Taiwan Semiconductor Manufacturing (NYSE: TSM).

While some may consider Intel (NASDAQ: INTC) a competitor, that's not the reality, and Taiwan Semiconductor has built a nearly unbreakable moat in the data center space. I think that makes it a top stock to buy right now, as it will be a direct beneficiary of the massive artificial intelligence (AI) spending that's still coming.

Image source: Getty Images.

TSMC's moat is stronger than Nvidia's

Right now, Nvidia is making the most computing units for data centers by a long shot. It established an early lead in the AI arms race by securing the initial market for AI computing units, but times are shifting. There's rising competition from Advanced Micro Devices (NASDAQ: AMD), which also makes GPUs. There are also workload-specific AI computing units being designed by Broadcom (NASDAQ: AVGO) and its AI hyperscaler clients that perform AI computing at lower cost and more effectively than Nvidia's or AMD's GPUs, threatening Nvidia's market share.

While Nvidia may eventually prevail, there's no guarantee. But there is one thing all three of these companies have in common: their chip supplier.

Taiwan Semiconductor (also known as TSMC) produces the logic chips for all three of these computing giants, as well as several others. It is the largest player in this space by far. During the second quarter, TrendForce estimates that TSMC generated 72.5% of all semiconductor revenue in the space. That's a massive advantage, and Intel didn't even crack the top 10. That's because its foundry business is still turning around and looking for more clients. While it could eventually see a resurgence, it won't be able to unseat Taiwan Semiconductor.

The reality is that Taiwan Semiconductor has such massive production capacity and deep ties with its clients that it will be nearly impossible for a competitor to steal a large chunk of its market share. While it might lose a job or two, the majority of all AI computing chips will still be made by Taiwan Semiconductor, and this should lead to further stock gains because the AI build-out is far from over.

Taiwan Semiconductor can still make a fortune from the AI build-out

Nvidia has some of the best feel for the strength of the AI industry, as it's in close contact with several of its clients regarding what future use will look like. During its most recent earnings call, Nvidia noted that this year's data center capital expenditures from the big five AI hyperscalers will approach $800 billion. Next year, that figure is estimated to rise to $1.3 trillion.

Ultimately, Nvidia sees global annual data center capital expenditures increasing to $3 trillion to $4 trillion by 2030. That's a massive market, and with Taiwan Semiconductor nearly locked into supplying the vast majority of these chips, it makes for an excellent investment.

Furthermore, TSMC announced an additional $100 billion investment in its Arizona production facilities during Q2, so clearly it sees more demand coming that requires increased production capacity. No other foundry could afford to spend $100 billion for more production capacity, which further underscores the strength of TSMC's business.

With uncertainty regarding which company will be the ultimate winner in the computing chips space, investing in the primary component supplier for these chips seems like a genius idea. That makes Taiwan Semiconductor a top AI stock pick moving forward, and I think investors will enjoy market-crushing returns with this stock.

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