Once-in-a-decade investment opportunity: Meet my favorite artificial intelligence (AI) semiconductor stocks (hint: it’s not Nvidia)

You may have heard that the value of semiconductor stocks like Nvidia has skyrocketed over the past few years, but do you know why? The answer is actually quite simple. Nvidia develops chipsets known as graphics processing units (GPUs), which are a key part of the infrastructure used in generative AI. Nvidia is widely recognized as one of the most influential players in AI, controlling an estimated 88% of the GPU market.

However, the GPU landscape contains far more opportunities than Nvidia. Below, I will explain in detail why I am focusing on Taiwan Semiconductor Manufacturing, a chip manufacturing specialist. (TSM -1.72%) As the best opportunity in the chip field for the next 10 years.

Why the next 10 years will be significant for Taiwanese semiconductors

According to Precedence Research, the global GPU market is currently valued at $75.8 billion. Precedence predicts that the GPU market will grow at a compound annual growth rate (CAGR) of 13.8% from 2024 to 2034, ultimately reaching $1.4 trillion by the beginning of the next decade. Masu.

be patient! Why is the expanding GPU market more of a tailwind for Taiwan Semiconductor than for Nvidia? Well, the answer has to do with increased competition. While Nvidia owns the GPU space for now, it faces direct competition from Advanced Micro Devices as well as peripheral competition from its own customers, including Microsoft, Tesla, Alphabet, Amazon, and Meta Platforms. Masu.

It’s entirely possible (and very likely in my opinion) that the chips introduced by the big tech companies aren’t as robust as Nvidia’s. However, the idea here is that price will become a bigger factor in the future AI budgeting process as companies have more options to choose from. As a result, NVIDIA may be forced to lower prices, which could hinder the company’s revenue and profit growth.

Conversely, increasing diversity in the GPU market should be more advantageous for Taiwan Semiconductor, which already works with many different chip designers. In some ways, Taiwan Semiconductor represents an agnostic view of the chip market. It doesn’t really matter which company’s chips reach higher demand levels compared to their peers. As long as GPUs remain an integral part of AI development, Taiwan Semiconductor’s manufacturing and manufacturing operations should continue to enjoy strong tailwinds.

Should you invest in Taiwanese semiconductor stocks now?

Currently, Taiwan Semiconductor’s price-to-earnings ratio (PER) is 32.2 times. As seen in the chart below, the company’s valuation has increased dramatically over the past 12 months, with the P/E ratio hovering around its 52-week high.

TSM PE Ratio Data by YCharts

I do think that Taiwan Semiconductor’s reputation has become a little more bubbly. While the stock isn’t terribly cheap, I think the long-term upside potential may not have been priced in yet.

The company’s forward P/E ratio of 29x is significantly lower than that of Nvidia and AMD (both of which are above 40x). To me, Taiwan Semiconductor’s valuation trends suggest that while investors are quite bullish on the company’s short-term prospects, they have not yet seriously considered its long-term prospects.

As mentioned above, the GPU market is expected to grow significantly over the next decade. And during this period, more products will be introduced to the market. This could be a major hindrance for Nvidia, but a catalyst for Taiwan Semiconductor.

I think Taiwan Semiconductor is one of the most attractive opportunities in the broader chip space. The company’s specialty manufacturing business, combined with a diverse customer roster with plenty of potential to expand, should help drive sustained growth over the next few years as the GPU market continues to evolve.