Forget Nvidia – Taiwan Semiconductor is the best way to invest in artificial intelligence (AI)

Nvidia (NASDAQ: NVDA) has captured the heart of the artificial intelligence (AI) investment trend, offering investors staggering growth rates and incredible dominance in the graphics processing unit (GPU) industry. However, challenges are starting to emerge within its business (although it is still dominant), with competitors building out their AI offerings and customers starting to design their own AI chips to train software models.

All of this leads me to believe that there is another company that is a better investment in AI, Taiwan Semiconductor Manufacturing (TSM -1.29%). Whichever AI company you’re talking about, it’s probably a TSMC customer, since TSMC is the largest contract chipmaker in the world. This means it acts as a fabrication shop for all things chip-related. With massive demand across the board, it’s set to benefit if Nvidia continues its dominance or if others knock it off its feet.

TSMC’s new product will be an important innovation

TSMC sat on the semiconductor throne for a while. It has competitors, but none offer the scale and technology it does. It can produce the world’s smallest and most powerful chip, which has a trace spacing of 3 nanometers (nm). It also has a 2nm chip in development that will significantly improve the energy efficiency of the 3nm chip, which is fantastic news for companies developing their AI computing power.

GPUs in these data centers consume power and cost a lot to run. If customers can equip them with products that perform similarly but improve energy consumption by 25% to 30%, they will be massively successful. Pre-production demand has already exceeded that of previous generation chips (3nm and 5nm), so this is a huge catalyst that will be realized once TSMC’s 2nm chips go into production in 2025.

This demand is on top of management’s projection that AI demand will grow at a compound annual growth rate (CAGR) of 50% through 2028 and account for more than 20% of its revenue by then. Over the long term, management sees its revenue growing at a CAGR of 15% to 20%, which is a fantastic rate by any measure.

But that pales in comparison to what Nvidia is seeing, so why would investors want to choose TSMC over Nvidia? It’s all about stability.

TSMC is a more consistent company

Both Nvidia and TSMC are cyclical businesses, but Nvidia’s volatility over a cycle is much higher than TSMC’s. Take a look at the chart below, which shows the percentage of each company’s revenue and earnings per share (EPS) that have fallen from their all-time highs.

TSM Revenue Data (Quarterly) by YCharts

As you can see, Nvidia’s declines are much deeper than TSMC’s, showing that its one-cycle decline is much larger. This probably has to do with the breadth of TSMC’s products, as its chips go into many more products than just GPUs.

Nvidia is a one-trick pony, even if that trick is amazing.

While some investors are on board with Nvidia’s booms and busts, I am not. Recognizing risk appetite is a huge part of investing, and if you’re a little worried about how Nvidia will perform already because of its massive growth, then TSMC is a great replacement to capitalize on the same tailwinds that propel Nvidia. superior.