1 of the Best Semiconductor Stocks Investors Can Buy Right Now

Key Points

• Taiwan Semiconductor is a key chip supplier for many top AI companies.

• Its business is growing at a rapid pace, and that looks set to continue.

• 10 stocks we like better than Taiwan Semiconductor Manufacturing ›

Semiconductor stocks are a critical part of any major technological trend. Without cutting-edge chips, the innovative technology we enjoy today wouldn't be possible. Furthermore, there aren't a ton of chip foundries out there, so if there's a new technology or trend that requires a ton of chips, there are relatively few companies that benefit.

The Motley Fool did research into the biggest semiconductor companies by revenue and found that Taiwan Semiconductor Manufacturing (NYSE: TSM) generated the most revenue by far of any semiconductor manufacturer. Even though it's the biggest, I think Taiwan Semi (or TSMC, as it's also known) is also the best semiconductor stock you can buy right now, especially with how closely tied it is to the biggest growth trends on the market.

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Image source: Getty Images.

TSMC is the primary chip supplier for several AI giants

Taiwan Semiconductor is the world's leading chip foundry for logic chips. This has positioned it perfectly to take advantage of the AI arms race, as some of its biggest clients are Nvidia, Advanced Micro Devices, and Broadcom. Considering how much AI hyperscalers are spending on computing equipment to build out their AI capabilities, these three companies are thriving -- and with all of them getting their chips from Taiwan Semiconductor, it is, too.

Part of the reason why TSMC has risen to the top is its commitment to continuous innovation. Taiwan Semiconductor's current best-performing chip is of the 3 nanometer variety. This naming convention is tied to the distance between electrical traces on a chip, so a 3nm chip implies 3nm spacing between traces.

Taiwan Semi's next chip node is a 2nm chip, which doesn't sound like a massive increase, but it allows them to decrease the spacing between traces by 50%. The benefits of this are enormous, and TSMC estimates that a chip configured for the same speed as a 3nm chip will consume 25% to 30% less power. With how much power these giant data centers consume, it's no surprise that the market is demanding more efficient chips.

Taiwan Semiconductor estimates that these chips will reach volume production before 2025 is over, but it's not done there. After its 2nm chip node, it is launching an A16 node in 2026, which will have a 15% to 20% power improvement over the 2nm chip. After that, its A14 technology is slated for production in 2028, which provides further improvements.

Taiwan Semiconductor is a continuous innovator, which will keep it on top of the list of top chip foundries for as long as it's committed to that goal. This ties in nicely with the direction of the AI industry, as there is slated to be monster growth over the next five years if Nvidia is right.

The AI market is expected to boom over the next five years

During Nvidia's Q2 conference call, management mentioned it expects global data center capital expenditures to reach $3 trillion to $4 trillion by 2030. Currently, the big four AI hyperscalers plan to spend $600 billion this year. That's monster growth, and Taiwan Semiconductor would be slated to grow by a similar amount because it's the primary chip supplier of the various computing units AI companies typically use, such as Nvidia's graphics processing units (GPUs).

In Q2, Taiwan Semiconductor's revenue increased at a 44% year-over-year pace in U.S. dollars to $30.07 billion, and if Nvidia's projection is correct, this growth rate won't change a lot over the next five years. This could make Taiwan Semiconductor a must-own stock, especially as new chip technology emerges.

Additionally, unlike other AI hardware companies (like the three mentioned above), Taiwan Semiconductor doesn't trade at too much of a premium. The stock is valued at 26.6 times forward earnings, which isn't all that cheap, but it's also not terribly expensive.

TSM PE Ratio (Forward) data by YCharts

This gives TSMC a solid starting spot and makes it a great buy now to capitalize on the massive AI spending that's still to come. I think Taiwan Semiconductor is the best semiconductor stock to buy now, but it's also among the best AI stocks to purchase.

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Keithen Drury has positions in Broadcom, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.