Artificial Intelligence (AI) is proving to be the hottest investment theme since the dawn of the internet. For investors looking at which AI stock to buy, the likes of Microsoft and Nvidia tend to dominate the conversation.
I suppose that’s understandable, with Microsoft having a huge stake in OpenAI, the maker of ChatGPT, and Nvidia controlling over 90% of the advanced AI chip market.
However, there are other companies poised to reap the benefits of this revolutionary technology over time. Here’s one such stock in my portfolio that I plan to put more money behind and hold for years.
The largest chip shop on earth
I’m talking about Taiwan Semiconductor Manufacturing Company (NYSE: TSM).
As the world’s largest contract semiconductor manufacturer, TSMC enables fabless chipmakers to operate more profitably. Its customers include Nvidia, Apple, Arm Holdings, Advanced Micro Devices, and many others.
Fabless refers to firms that design and sell semiconductors but don’t own any fabrication facilities (fabs or foundries). They leave the manufacturing to the likes of TSMC, and with good reason too.
A foundry capable of making the most advanced chips today costs $10bn-$20bn. Then there’s the constant upgrade to existing facilities and buying of the latest cutting-edge equipment to stay on top.
Indeed, TSMC is currently budgeting for full-year capital expenditure of $28bn-$32bn. A colossal sum!
A reasonable valuation despite a record high share price
The share price has exploded this year, rising 54%. In fact, it’s regularly hitting new all-time highs.
Despite this though, the stock’s trading at a valuation of 30 times earnings. That’s noticeably lower than the likes of Microsoft (37) and Nvidia (60).
Now one thing to bear in mind here is that there can be cyclicality in the business. Right now, for example, there’s weakness in demand for vehicle and iPhone chips. So the firm isn’t firing on all cylinders.
However, the good news is that the AI boom’s more than offsetting this. Wall Street sees TSMC posting revenue of about $84bn in 2024, a 23% uplift from last year. Then 20%+ revenue growth next year too.
For 2025, the stock drops to a forward earnings multiple of just 17.5. That valuation looks very attractive.
Keeping things simple
Another thing to note about the company is just how incredibly profitable it is. We’re talking about a net profit margin of around 40%, versus an industry average of 14%.
Looking ahead, it’s hard not to be bullish on the growth story here. Amazon, Tesla and Microsoft are all making their own AI chips — through TSMC, of course — so demand should remain strong for years.
Indeed, TSMC expects its AI-related revenue to grow at a rate of 50% annually for the foreseeable future.
In April, the company’s chief executive CC Wei said: “Almost all the AI innovators are working with TSMC to address an insatiable AI-related demand for energy efficient computing power.”
That’s what I like here. I don’t have to pick this or that AI winner. I can just invest in the firm that’s making most of the high-end chips for everyone.
AI spending’s expected to soar to top $1.8trn by 2030, according to Grand View Research. So I reckon TSMC stock’s a solid long-term buy-and-hold for me in the age of AI.
