It’s not an easy task to name the best AI (artificial intelligence) stock to buy right now. There are many considerations: what the company could do, what it’s doing now, how expensive the stock is, and whether it has room to expand. All of these factors go into determining the best AI stock right now.
I think I found the candidate with the perfect combination: Taiwanese semiconductor production (NYSE:TSM)It is one of the few companies that I know of that excels in all the factors I mentioned above, making it an attractive investment case for the stock.
2024 was an excellent year for TSMC
Taiwan Semiconductor — also known as TSMC — is the world’s largest contract chip manufacturing company. Essentially, customers come in with a chip design and TSMC manufactures it for them. Apple iPhones wouldn’t be the same without TSMC, and Nvidia GPUs wouldn’t create incredible AI models.
With the rising demand for AI chips, TSMC’s monthly revenue in 2024 has far exceeded that of 2023. Admittedly, 2023 was a relatively weak year for chip demand. However, the continued month-on-month outperformance is a good sign that TSMC’s business is picking up.
Month |
Sales growth (annual) |
---|---|
January |
7.9% |
February |
11.3% |
March |
34.3% |
April |
59.6% |
Be able to |
30.1% |
June |
32.9% |
July |
44.7% |
August |
33% |
Data source: Taiwan Semiconductor. YoY = year-on-year.
Taiwan Semiconductor also has some huge tailwinds ahead of it. Apple accounts for about 25% of revenue in any given year, and it’s no secret that demand for iPhones has been at an all-time high. With Apple’s AI model, Apple Intelligence, only available on iPhones 15 and later, this could spark an upgrade cycle that results in huge sales for TSMC.
TSMC is already busy developing the next generation of chips, even though the latest generation of 3-nanometer chips has only recently been released and is still growing in popularity. The 2nm chip can offer a 10% to 15% speed improvement over the 3nm chip when configured for the same power consumption, but offers 25% to 30% more power efficiency when configured at the same speed level.
If the operating costs for giant data centers are so high due to electricity alone, the improvements this generation of chips could bring are incredible. They could trigger an upgrade cycle in and of themselves based solely on long-term cost savings. Management is seeing more interest in its 2nm chips at this stage of development than in 3nm or 5nm chips, suggesting strong demand once it goes into production sometime in 2025.
It’s clear that TSMC has a lot going for it on the business front, with plenty of room to expand and short-term tailwinds to push it higher in the meantime. But is the stock in a place where it’s worth buying?
The stock is not that expensive compared to other market products
The market knows all of the above, so it has given TSMC a bit of a valuation premium. However, it’s not at the same level as some other AI stocks and it’s not far off where the broader market (as measured by the S&P 500) trade.
At 26 times forward earnings, TSMC isn’t the cheapest stock in the world. But with the S&P 500 trading at around 22.7 times forward earnings, it doesn’t seem like a steep premium to pay. It even seems reasonable compared to some more conservative, non-tech investments.
Company |
Price/Earnings Outlook |
Latest quarter revenue growth |
Dividend yield |
---|---|---|---|
Taiwanese semiconductor |
26.3 |
32.9% |
1.3% |
Coca Cola |
25.0 |
3.2% |
2.7% |
Home Depot |
25.4 |
0.6% |
2.3% |
Walmart |
33.0 |
4.8% |
1% |
Data source: YCharts.
TSMC is growing much faster than these basic companies, has a decent dividend, and can be bought for about the same price.
To me, Taiwan Semiconductor is about the most obvious buy out there, as the tailwinds blowing in its favor are huge. Combine that with a stock price that isn’t overvalued, and TSMC looks like a top AI investment.
Should You Invest $1,000 in Taiwan Semiconductor Manufacturing Now?
Before you buy Taiwan Semiconductor Manufacturing stock, you should consider the following:
The Motley Fool Stock Advisor team of analysts has just identified what they think is the 10 best stocks for investors to buy now… and Taiwan Semiconductor Manufacturing wasn’t one of them. The 10 stocks that made the cut could deliver monster returns in the years to come.
Think about when Nvidia made this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $694,743!*
Stock Advisor offers investors an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks each month. The Stock Advisor has service more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns as of September 16, 2024
Keithen Drury has positions in Home Depot and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Apple, Home Depot, Nvidia, Taiwan Semiconductor Manufacturing and Walmart. The Motley Fool has a disclosure policy.
Opinion: This Is The Best Artificial Intelligence (AI) Stock To Buy Right Now was originally published by The Motley Fool