There is no denying it Nvidia has been at the center of the artificial intelligence (AI) revolution so far. The technology powers the vast majority of AI platforms in the world, simply because it offers the most processing power. And Nvidia stock has performed accordingly since the movement began in earnest early last year.
However, as in any other industry, time drives change in AI. Nvidia is no longer the best bet in the market. This title is shifting towards Taiwanese semiconductor manufacturer (NYSE:TSM)which is likely better positioned to capitalize on the next chapter in AI growth.
Taiwan Semiconductor is behind the scenes… all
Nvidia is not doomed. But it would be naive not to recognize that most of the easy money in AI has already been made. Competition is heating up. Intel And Advanced micro devices up their game. There are price wars going on.
There’s one often overlooked but important detail about the AI hardware business that you need to understand, however. It’s that chipmakers like the aforementioned Nvidia and AMD typically don’t manufacture their own chips. They typically outsource such work to third-party “contract” manufacturers who are able to fabricate this silicon to their designers’ specifications.
Taiwan Semiconductor is one of these contract manufacturers. In fact, it is the biggest name in the industry. It is estimated to produce about two-thirds of the world’s semiconductors and related circuitry, and an even larger share if you look at the world’s high-performance chip market alone.
This might help to make the point: Advanced Micro Devices and Nvidia are both confirmed customers of Taiwan Semiconductor. Intel continues to invest in building its own foundries, although it has a development partnership with Taiwan Semiconductor for this purpose.
Connect the dots. Taiwan Semiconductor may be the technological heart and soul of the global AI revolution.
And it’s not limited to data centers. As time goes on, AI computing is making its way to end users, and specifically end users’ mobile phones. AppleThe company’s latest processor — the A17, found in the iPhone 15 Pro and Pro Max — can perform generative AI tasks on the device itself instead of in the cloud, where most generative AI work is currently done.
And it’s not just Apple that’s venturing into the realm of artificial intelligence in devices. QualcommThe latest, powerful Snapdragon 8 (Gen 3) mobile processors can handle the same load on mobile devices.
Both Apple and Qualcomm use Taiwan Semiconductor’s chip manufacturing services.
There are still plenty of opportunities
Taiwan Semiconductor Manufacturing, by the way, doesn’t make every chip used by the aforementioned companies, nor does it produce every AI chip the world currently uses or will use in the future. It is likely losing market share as other players ramp up their capacity to produce this silicon. Intel in particular shows the potential to become a serious competitor to Taiwan Semiconductor.
There’s still more potential here than not, though, despite the prospect of a shrinking market share. Market research firm Skyquest suggests that the artificial intelligence hardware market is expected to grow at a compound annual rate of 15.5% through 2031, while the mobile AI market is likely to grow at a compound annual rate of nearly 27% for the same period. In this vein, the analyst community believes that Taiwan Semiconductor’s revenue is expected to nearly double between last year and 2026 as the AI chip industry unifies.
So why is this stock down more than 20% from its July peak (while many other AI names have seen similar declines)? It has more to do with the market environment than anything else. Investors finally started to realize last month that a few too many stocks had reached frothy valuations. The disappointing July jobs report released last Friday didn’t help matters either, leading the crowd to assume that continued economic weakness is on the horizon.
And maybe that’s true.
But don’t lose perspective. Even in a tough economic environment, most chip makers will still need new silicon. And most of them still won’t be able to make much (or any) of it themselves. They’ll still need Taiwan Semiconductor to make it for them. Economic weakness could even suppress capital spending on new foundries, making a proven, cost-effective foundry like Taiwan Semiconductor Manufacturing all the more important to the biggest players in the AI business.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Nvidia, Qualcomm and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: long Jan 2025 $45 calls on Intel and short Aug 2024 $35 calls on Intel. The Motley Fool has a disclosure policy.
Forget Nvidia: Buy This Awesome Artificial Intelligence (AI) Stock Instead was originally published by The Motley Fool
