TSM

Missed Out on Nvidia and Arm? This AI Stock Still Looks Cheap

Two of the biggest names in artificial intelligence (AI) of late have been chip powerhouses Arm Holdings (NASDAQ: ARM) and Nvidia (NASDAQ: NVDA). Shares of the former have soared 70% so far this year while the latter is coming off an exceptional 2023 during which its value skyrocketed by nearly 239% en route to making it one of the most valuable companies in the world. For investors looking to take advantage of the growth opportunities within AI, it may seem like it's too late to invest in the best players.

Both Arm and Nvidia are likely to keep growing, but investors may not be too keen on buying them at their current valuations. But not all AI stocks trade at a huge premium today. One that still looks relatively cheap is Taiwan Semiconductor Manufacturing (NYSE: TSM), better known as TSMC.

Is TSMC an underrated AI play?

TSMC is the world's leading third-party semiconductor foundry, and its business can benefit significantly from an uptick in demand for chips. The company projects that this year, its top line could grow by more than 20% as it benefits from strong demand for higher-end chips. CEO C.C. Wei sees the business playing a big role in the future of AI: "We are a key enabler for AI applications. So far today, everything you saw for AI comes from TSMC."

TSMC's projected revenue growth is encouraging. The company has been battling headwinds due to a slowdown in demand for consumer electronics, and AI could give it a much-needed growth catalyst. Its revenue for Q4 2023 totaled $19.6 billion -- down 1.5% year over year. But on a quarter-over-quarter basis, revenue and profits were up 14% and 13%, respectively. The company does appear to be on a much stronger trajectory.

TSMC's stock trades at an attractive valuation

Based on analysts' expectations of future profits, TSMC's stock is fairly cheap, trading at a forward price-to-earnings multiple of just 20. That looks like a bargain compared to both Nvidia and Arm.

NVDA PE Ratio (Forward) Chart

NVDA PE Ratio (Forward) data by YCharts.

There are, however, a couple of reasons investors may have chosen shares of Nvidia or Arm instead of TSMC. The first is that TSMC is based in Taiwan, so there's some geopolitical risk there to consider. That may be keeping investors away despite TSMC's potential.

Secondly, the company recently pushed back the timelines on the new factories it is building in Arizona. TSMC is investing $40 billion to build two manufacturing facilities there. The first, originally intended to be operational in 2024, won't be until 2025 -- due, the company says, to its inability to find enough workers with the specialized skills the fab requires. The second fab now won't come online until 2027 or 2028; it was previously expected to be operational by 2026. While these factories are still being built, the delays may have dissuaded investors from investing in TSMC stock right now.

Should you invest in Taiwan Semiconductor Manufacturing?

Whether you're a frequent tech sector investor or are simply bullish on AI stocks, TSMC can be a great way to invest in technology. The semiconductor giant has been facing headwinds due to slowing consumer demand, but those aren't long-term issues. Once they subside, the company could benefit from both strong AI demand and a resurgence in demand for consumer electronics. In the long run, TSMC has the potential to join Nvidia and others in the $1 trillion market cap club.

At a relatively modest valuation, it could be one of the better AI stocks to buy right now.

Should you invest $1,000 in Taiwan Semiconductor Manufacturing right now?

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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