I see this as a more stable AI play.
Everyone is talking about Nvidia (NVDA -0.42%), and it’s been that way for a few years already. The artificial intelligence (AI) giant’s stock gained 1,600% over the past five years, and it reached a tremendous milestone this month, becoming the first $4 trillion company.
But if I had to choose an AI stock to buy today, it wouldn’t be Nvidia. Not because Nvidia isn’t an excellent company with lots of potential, but because there’s another stock that looks more compelling to me today.
The AI moment
To be honest, I haven’t been looking for an AI stock. Many investors want to cash in on AI trends by determining which stocks offer exposure to AI. That’s not how I invest; I have criteria I look to satisfy in stocks that could be in any industry, although category diversification is definitely important.
But I understand the desire to invest in AI, especially if you’re a growth investor. There’s tons of growth happening in AI, with a lot more expected. Nvidia itself is reporting fabulous increases, including a 69% rise in revenue year over year in its most recent quarter. According to Grand View Research, the AI market is expected to increase at a compound annual growth rate of nearly 36% through 2030.
Image source: Getty Images.
However, there are mixed views on Nvidia today, trading as high as it is. There seems to be little doubt that it can continue to grow, but there’s some risk in its sky-high value, and according to certain metrics, it could be expensive. Nvidia stock trades at a price-to-sales ratio of 29 and a P/E ratio of 55. It’s worth a certain premium, but premium it is.
There also may be a ceiling on just how much growth it offers investors, considering its size. If Nvidia stock doubles, it will reach $8 trillion in market cap. If you’re looking for a stock that can double your money, Nvidia may not be able to do that as quickly as other stocks.
Another way to play AI
So which stock would I choose instead? I recently bought shares of Taiwan Semiconductor Manufacturing (TSM -2.12%), so that’s an easy answer. Again, I didn’t buy it to buy an AI stock. It stood out to me for a variety of reasons, one of which is its growth prospects, and that’s tied to advances in AI that require its products. If, however, it was only an AI stock and didn’t have other opportunities, I would not have considered it.
So that’s one reason TSMC looks attractive as a stock: It’s not a one-trick pony. There are risks in investing in pure-play AI stocks like there are risks in investing in any company that relies on a current trend for its business. It was briefly in the Berkshire Hathaway portfolio in 2023, which can give you a sense of its stability. At the time, Buffett called it “one of the best-managed companies and [most] important companies in the world.” Buffett doesn’t usually give reasons for selling a stock, but he was open about his take on TSM. He was worried about its location, seeing risks that have to some degree played out today. “Marvelous people and marvelous competitive position and everything,” he said, “[but] I’d rather find it in the United States.”
I say it played out that way to some degree because it does seem to be susceptible to changes in tariffs, but it has continued to demonstrate resilience and growth nonetheless, and it’s also taking action to diversify its global factories and have less exposure to tariffs. That’s a thumbs-up for the investing thesis.
TSMC works with many clients and is responsible for 58% of the global semiconductor market, according to Statista. As the current leader, it has an edge against the competition in an industry with high barriers to entry. Since it has many partners in many spaces, it’s protected against changes in any one of them, like AI.
Top performance, huge growth potential, low price
Then there’s the baseline strength you want to see in a great stock: solid growth, robust profitability, and a long-term outlook.
In the second quarter, revenue rose 39% year over year, topping estimates, and net income was up 61%. Gross margin improved by 5.1 percentage points, and operating margin by 7.1 percentage points. The high-performance computing segment, which includes AI, increased to 60% of the total, but all of its segments enjoyed growth except for automotive, which remained flat. AI is likely to remain the major growth driver for now, but it doesn’t have all of its eggs in one basket.
There are continued concerns about tariffs, and there may be a surge in demand for importers to get chips before tariffs are raised. Management has pointed out that importers are responsible for tariffs, not TSMC, and it’s also heavily investing in U.S. facilities to offset these risks.
Taiwan Semiconductor stock trades at a P/E ratio of 31 and a price-to-sales ratio of 13, which is reasonable for a stock with its potential. If you’re looking for a top AI stock that’s more than just AI, Taiwan Semiconductor is a great choice.