Nvidia CEO Just Explained Why This Is The Artificial Intelligence (AI) Chip Stock He Owns

No company was a bigger winner than Nvidia (NASDAQ: NVDA) as nearly every technology company has collectively invested billions of dollars in developing their generative artificial intelligence (AI) capabilities. The company added $2.5 trillion to its market cap in the past two years as sales and profits exploded along with demand for its GPUs.

The chipmaker has shown incredible pricing power amid strong demand. This is evidenced by the expansion of its gross margin in the upper 70% range. And with the booming sales growth, a very high operating leverage has been observed, which translates into a massive increase in profit. Certainly, Nvidia’s performance as a business, not just as a stock, over the past two years has been absolutely phenomenal.

But Nvidia isn’t the only AI chip stock on the market. And CEO Jensen Huang just explained why another company might be worth owning, perhaps even more than his own company.

“The best in the world by an incredible margin”

At an investor conference earlier this month, Huang had praise for one of Nvidia’s biggest business partners: Taiwan Semiconductor Manufacturing (NYSE: TSM)known as TSMC.

TSMC is the largest semiconductor foundry, or fab, in the world. When a company like Nvidia designs a new chip, it takes TSMC to actually print the design onto a silicon wafer. This requires incredible precision and innovative technical capabilities. TSMC is the top choice for many chip designers, including Nvidia. TSMC handles more than 60% of global chip foundry spending.

“We’re talking about TSMC because it’s the best in the world,” Huang said. “And it’s the best in the world, not by a small margin, it’s the best in the world by an incredible margin.”

That’s why Nvidia and pretty much anyone else who needs to make cutting-edge chips choose TSMC over its competitors. Huang said Nvidia could switch to another foundry if it had to. But he also said competitors’ capabilities could not match TSMC’s and would result in lower performance or higher costs.

He also praised TSMC’s ability to expand its operations. When Nvidia saw demand for its chips skyrocket, TSMC was able to help it meet that growing demand so it could take advantage of the opportunity. Any business that needs to be able to scale needs to work with TSMC.

Importantly, TSMC’s position as the market leader, earning the majority of industry revenue, ensures that it will remain in its leading position. It has more money to reinvest in research and development and create the next generation of processes. The virtuous cycle leads to more and more big contracts with big tech companies designing super high-end chips over time.

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TSMC still has a lot of growth left

TSMC might be the biggest company in the industry, but there’s still plenty of growth to capture.

All tech companies are planning to ramp up their spending on AI systems in the data center. Total spending on AI chip content and related systems will reach $193.3 billion in 2027, according to IDC estimates. That’s up from $117.5 billion this year, translating to a compound annual growth rate of 18 percent over the next three years.

Importantly, TSMC is very agnostic about this growth. Whether that growth comes from Nvidia, one of its competitors, or custom chips designed by its biggest customers, TSMC will likely win the bulk of those contracts. In fact, the virtuous cycle and TSMC’s leadership in high-end chips means it could grow that part of its business even faster than the industry. In addition, TSMC has room to improve its margins.

All of this is reflected in analysts’ forecasts for the company over the next five years. The average analyst expects TSMC to grow revenue by more than 20% annually over the next half-decade. But you don’t have to pay for this increase. The stock is currently trading at just over 20 times the consensus forecast for 2025.

Few other companies offer the same level of potential growth at that price. So not only is it the best factory in the world by an incredible margin, but investors can buy a stake in it right now at an incredible price.

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Adam Levy has positions in Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.

Nvidia CEO Just Explained Why This Is The Artificial Intelligence (AI) Chip Stock To Own was originally published by The Motley Fool