There is no denying it NVIDIA has been at the heart of the artificial intelligence (AI) revolution so far. Its technology is used in the vast majority of the world’s AI platforms simply because it offers the most computing power. And Nvidia shares have performed accordingly since the movement got underway in earnest early last year.
However, as in any other industry, time is driving change on the AI front. Nvidia is no longer the market’s biggest opportunity. That title is shifting towards Taiwanese semiconductor manufacturing company (NYSE:TSM)which is arguably better positioned to benefit from the next chapter of AI’s growth story.
Taiwan Semiconductor is behind the scenes… everywhere
Nvidia is not doomed. But it would be naive not to recognize that most of the easy money made with artificial intelligence has already been made. The competition is getting tougher. Intel And Advanced micro devices increase their performance. There are price wars.
However, there is an often overlooked but important detail in the AI hardware business that you need to understand. Chip manufacturers like the aforementioned Nvidia and AMD don’t typically make their chips themselves. They typically outsource such work to third-party “contract manufacturers” who are able to manufacture that silicon to their designers’ specifications.
Taiwan Semiconductor is one of these contract manufacturers. In fact, the company is the biggest name in the industry. It is estimated that the company produces about two-thirds of all semiconductors and related circuits in the world. If you look at the global market for high-performance chips alone, the share is even larger.
This might help clarify 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 entered into a development partnership with Taiwan Semiconductor for that purpose.
Connect the dots. Taiwan Semiconductor may actually be the technological heart and soul of the global AI revolution.
And it’s not limited to data centers. Over time, AI computing will also reach end users, especially their mobile phones. AppleThe latest processor – the A17, found in the iPhone 15 Pro and Pro Max – can handle generative AI tasks on the device itself rather than in the cloud, where most generative AI work is currently done.
And it’s not just Apple that’s venturing into the waters of device-embedded artificial intelligence. QualcommThe latest powerful Snapdragon 8 (Gen 3) mobile processors can handle the same workload on mobile devices.
Both Apple and Qualcomm use Taiwan Semiconductor’s chip manufacturing services.
There are still many possibilities
By the way, Taiwan Semiconductor Manufacturing does not manufacture every chip used by the above companies, nor every AI chip currently in use around the world or that will be used in the future. In fact, the company is likely losing market share as other players increase their capacity to produce this silicon. Intel in particular shows the potential to become a serious competitor to Taiwan Semiconductor.
However, despite the prospect of shrinking market share, there is still more potential here than downside. Market research firm Skyquest expects the artificial intelligence hardware market to grow 15.5% annually through 2031, while the mobile AI market is expected to grow nearly 27% annually over the same period. With that in mind, the analyst community believes Taiwan Semiconductor’s revenue will almost double between last year and 2026 as the AI chip manufacturing industry converges.
So why has this stock fallen more than 20% since its July peak (and many other artificial intelligence names have fallen similarly)? It has more to do with the market environment than anything else. Last month, investors finally realized that a few too many stocks had reached too high a valuation. The disappointing July jobs report released last Friday didn’t help either, leading investors to believe that continued economic weakness is on the way.
And maybe it is.
But don’t lose perspective. Even in a tough economic environment, most chipmakers will still need new silicon. And most of them still don’t have the ability to make much (if any) of it themselves. They’ll still need Taiwan Semiconductor to make it for them. In fact, economic weakness may even curb investment in new foundries, making a proven, low-cost foundry like Taiwan Semiconductor Manufacturing all the more important to the AI industry’s biggest players.
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James Brumley does not own any of the stocks mentioned. The Motley Fool owns 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 January 2025 $45 calls on Intel and short August 2024 $35 calls on Intel. The Motley Fool has a disclosure policy.
Forget Nvidia: Buy This Great Artificial Intelligence (AI) Stock Instead was originally published by The Motley Fool
