Opinion: This is the best artificial intelligence (AI) stock to buy right now | The Pied Fool

Naming the best artificial intelligence (AI) stock to buy right now is no easy task. There are many considerations: what the company could do, what it’s doing now, how expensive the stock is, and whether it has room to grow. All of these factors go into determining the best AI stock right now.

I think I found the candidate with the perfect combination: Taiwan Semiconductor Manufacturing (TSM -0.89%). It’s one of the few companies I know that excels in all the factors I mentioned above, which makes a compelling investment case for the stock.

2024 was an excellent year for TSMC

Taiwan Semiconductor — also known as TSMC — is the world’s largest contract chip manufacturing company. Essentially, customers come to it with a chip design and TSMC manufactures it for them. Apple iPhones wouldn’t be the same without TSMC and Nvidia GPUs wouldn’t create incredible AI models.

With the increase in demand for AI chips, TSMC’s monthly revenue in 2024 far exceeded that of 2023. Of course, 2023 was a relatively weak year for chip demand. However, the continued month-over-month performance is a great sign that TSMC’s business is recovering.

Data source: Taiwan Semiconductor. YoY = year over year.

Taiwan Semiconductor also has great tailwinds. Apple accounts for about 25% of its revenue in any given year, and it’s no secret that demand for the iPhone hasn’t been that high. With Apple’s AI model, Apple Intelligence, only available on the iPhone 15 and newer models, this could trigger an upgrade cycle that will result in massive sales for TSMC.

TSMC is already developing the next generation of chips, even though its latest generation of 3-nanometer chips was released recently and is still growing in popularity. The 2nm chip can provide a 10% to 15% speed improvement over the 3nm chip when configured for the same power consumption, but provides 25% to 30% more efficiency when configured at same speed level.

When operating costs for giant data centers are so high due to electricity, the improvements this generation of chips can provide are incredible. They could themselves trigger an upgrade cycle based solely on long-term cost savings. Management sees more interest in its 2nm chips than its 3nm or 5nm chips at this stage of development, indicating strong demand once it reaches production sometime in 2025.

TSMC clearly has a lot of growing to do on the business side, with plenty of room to expand and near-term headwinds to push it higher in the meantime. But is the stock in a place worth buying?

Shares are not that expensive compared to other market staples

The market knows all the points listed above, so it has given TSMC a valuation premium. However, it’s not nearly at the same level as other AI stocks, and it’s not far off the broader market (as measured by S&P 500) jobs.

TSM PE Ratio data (before) by YCharts

At 26 times forward earnings, TSMC isn’t the cheapest stock in the world. However, with the S&P 500 trading at about 22.7 times forward earnings, it doesn’t seem like that much of a premium to pay. It even seems quite reasonable compared to some more conservative, non-tech investments.

Data source: YCharts.

TSMC is growing much faster than these staples, has a respectable dividend, and can be bought for roughly the same price.

To me, Taiwan Semiconductor is an unusual buy as much because the tailwinds blowing in its favor are massive. Combine that with a stock price that isn’t overvalued, and TSMC looks like a top AI investment.

Keithen Drury has positions in Home Depot and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Apple, Home Depot, Nvidia, Taiwan Semiconductor Manufacturing and Walmart. The Motley Fool has a disclosure policy.