Forget Nvidia: buy this magnificent artificial intelligence (AI) stock instead.

It cannot be denied Nvidia has been the centerpiece of the artificial intelligence (AI) revolution so far. Its technology is used in the vast majority of AI platforms in the world simply because it offers the most computing power. And Nvidia’s stock has performed accordingly since the move began in earnest early last year.

However, as with any other industry, time drives change on the AI ​​front. Nvidia is no longer the biggest market opportunity. This title goes to Taiwan Semiconductor Manufacturing Company (TSM 1.56%)which is arguably better positioned to capitalize on the next chapter in the AI ​​growth story.

Taiwan Semiconductor is behind the scenes… all of it

Nvidia is not condemned. But it would be naive not to recognize that most of AI’s easy money has already been earned. The competition is heating up. Intel and Advanced microdevices stepping up their games. The price wars are on.

There is an often overlooked but important detail about the AI ​​hardware business that you need to understand, however. That is, chip makers like the aforementioned Nvidia and AMD usually don’t make their own chips. They typically outsource such work to third-party “contract” manufacturers who are able to fabricate this silicon to its designers’ specifications.

Taiwan Semiconductor is one of these contract manufacturers. Indeed, it is the biggest name in the business. It is estimated to produce about two-thirds of the world’s semiconductors and related circuits, and an even higher share when looking at the planet’s high-performance chip market alone.

This might help drive the point home: Advanced Micro Devices as well as Nvidia are both confirmed customers of Taiwan Semiconductor. Intel continues to invest in building its own foundries, though it has entered into a development partnership with Taiwan Semiconductor to do so.

Connect the dots. Taiwan Semiconductor may actually be the technological heart and soul of the global AI revolution.

And it’s not limited to data centers. As time goes on, AI computing work is moving to end users and especially to end users’ mobile phones. AppleIts newest processor — the A17 found in the iPhone 15 Pro and Pro Max — is able to handle generative AI tasks on the device itself, rather than in the cloud, where most of the generative AI work is done .

It’s not just Apple wading into the waters of on-device AI. QualcommThe latest high-performance Snapdragon 8 (Gen 3) mobile processors can handle the same kind of load on mobile devices.

Apple as well as Qualcomm also use the chip manufacturing services of Taiwan Semiconductor.

Still more opportunities ahead

Taiwan Semiconductor Manufacturing does not make every chip used by the aforementioned equipment, for the record, nor does it make every AI chip the world currently uses or will use in the future. It will likely lose market share as other players step up their ability to actually extract this silicon. Intel, in particular, shows the potential to become a serious competitor for Taiwan Semiconductor.

Still, there are more upsides here than not, despite the prospect of declining market share. Market research team Skyquest suggests that the AI ​​hardware market will grow at an annual rate of 15.5% until 2031, while the mobile AI market is likely to grow at a compound annual rate of nearly 27% for the same time interval. In this regard, the analyst community believes that Taiwan Semiconductor’s top line is close to doubling between last year and 2026 as the AI ​​chip manufacturing industry gels.

Data source: StockAnalysis.com. Chart by author. Figures are in New Taiwan Dollars.

So why is this stock down more than 20% just from its peak in July (with many other AI names similarly down)? That has more to do with the market environment than anything else. Investors finally began to realize last month that too many stocks have reached too frothy valuations. The disappointing July jobs report released last Friday didn’t help either, leading the crowd to assume that lingering economic weakness is on the horizon.

And maybe it is.

Don’t lose perspective, though. Even in a difficult economic environment, most chip brands will need new silicon. And most of them are not yet in a position to do much (if any) of it themselves. Next they will need Taiwan Semiconductor to make them. Indeed, the economic weakness could even stifle capital spending for new foundries, making a proven and profitable foundry like Taiwan Semiconductor Manufacturing all the more important to the biggest players in the AI ​​business.