There's no denying that NVIDIA has been at the center of the artificial intelligence (AI) revolution so far. The company's technology powers the majority of the world's AI platforms because it has the most computational power. And since the movement began in earnest early last year, NVIDIA's stock price has risen accordingly.
But like any industry, times are changing in AI, and Nvidia is no longer the biggest opportunity in the market. That position is shifting to Taiwan Semiconductor Manufacturing Company (NYSE: TSM), a company arguably better positioned to capitalize on the next chapter of AI's growth story.
Taiwan Semiconductor goes behind the scenes…all
Nvidia isn't doomed. But it would be naive to not recognize that most of the easy money in AI is already here. Competition is heating up. Intel and Advanced Micro Devices are heating up their competition. A price war is underway.
But there's a key detail that's often overlooked when it comes to the AI hardware business: chipmakers like the aforementioned Nvidia and AMD don't typically manufacture their own chips. Typically, that work is outsourced to third-party “contract” manufacturers who can produce this silicon to designers' specifications.
Taiwan Semiconductor is one such contract manufacturer. In fact, it's the largest in the industry: It's estimated that it produces roughly two-thirds of the world's semiconductors and related circuitry, and an even larger share of the global high-performance chip market alone.
This may help clarify the point: Advanced Micro Devices and Nvidia are both confirmed customers of Taiwan Semiconductor, and Intel has a development partnership with Taiwan Semiconductor but continues to invest in building its own foundries.
Let's connect the dots: Taiwan Semiconductor may actually be at the technological heart of the global AI revolution.
And it's not just limited to data centers. Over time, AI computing efforts are moving to the end user, specifically to their mobile phones. Apple's latest processor, the A17, found in the iPhone 15 Pro and Pro Max, can process generative AI tasks on the device itself, rather than in the cloud, where most generative AI work is done today.
Apple isn't the only company getting into the on-device artificial intelligence space: Qualcomm's latest high-performance Snapdragon 8 (Gen 3) mobile processor can handle similar workloads on mobile devices.
The story continues
Apple and Qualcomm also use Taiwan Semiconductor's chip manufacturing services.
There are plenty of opportunities ahead
Incidentally, Taiwan Semiconductor Manufacturing does not manufacture all of the chips used by the aforementioned companies, nor does it manufacture all of the AI chips currently in use in the world or that will be used in the future. In fact, Taiwan Semiconductor is likely losing market share as other companies ramp up production capacity for this silicon. Intel, in particular, has shown the potential to be a formidable competitor to Taiwan Semiconductor.
But despite the prospect of a shrinking market share, there is still plenty of room for upside. Market research firm SkyQuest predicts that the artificial intelligence hardware market will grow at an annual rate of 15.5% through 2031, while the mobile AI market could grow at nearly 27% annually over the same period. In this vein, the analyst community expects Taiwan Semiconductor's sales to nearly double between last year and 2026 as the AI chip manufacturing industry consolidates.
Data source: StockAnalysis.com. Graph by author. Figures in New Taiwan dollars.
So why is the stock down more than 20% from its July peak (as have many other AI stocks)? It has more to do with market conditions than anything else. Investors have finally started to realize over the last month that many stocks are overvalued. The disappointing July jobs report released last Friday only exacerbated the situation, leading people to speculate that a period of prolonged economic weakness is on the way.
And it may be so.
But let's not lose perspective. Even in a tough economy, most chip brands still need new silicon. And most of them are still not in a position to manufacture it themselves (if at all). They will still outsource it to Taiwan Semiconductor. In fact, a weak economy may even discourage capital investment in new foundries, making proven, cost-efficient foundries like Taiwan Semiconductor Manufacturing all the more important for the big players in the AI business.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Advanced Micro Devices, Apple, Nvidia, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and has recommended buying Intel's January 2025 $45 calls and selling Intel's August 2024 $35 calls. The Motley Fool has a disclosure policy.
“Forget Nvidia and Buy This Great Artificial Intelligence Stock Instead” was originally published by The Motley Fool.
