For investors looking for artificial intelligence (AI) stocks to consider buying, there doesn’t appear to be much value around. Most AI-related shares aren’t wha’d call cheap after the game-changing technology went mainstream last year.
However, leading chipmaker Taiwan Semiconductor Manufacturing (NYSE: TSM) looks undervalued to me. The stock can be scooped up for just 15 times 2024’s forecast earnings.
Here’s why I’ve come round to the idea of adding shares of TSMC (as it’s known) to my portfolio.
A trusted partner
It was founded in 1987 with the promise never to design chips, only to manufacture them. Importantly, this meant that the firm would never compete with its customers.
Today, it’s the go-to contract chipmaker for both Apple and Nvidia, as well as a thousand other firms, including Tesla. They bring the designs and TSMC does the building.
Looking forward, it seems certain that data centres, smartphones, or any new cutting-edge technology, will need increasingly powerful chips.
However, that doesn’t mean TSMC is immune to the cyclical nature of the global economy. In 2023, it expects net sales to have fallen around 10% year on year to $68bn.
But once the global economy recovers and customers work through excess stock, revenue should power higher. Wall Street expects as much as $100bn in revenue for 2025.
Meanwhile, the firm boasts an incredible 38%-40% net profit margin.
Cheap for a reason
The shares are likely cheap due to rising geopolitical tensions between Taiwan and China.
Indeed, it was political risk that made Warren Buffett sell Berkshire Hathaway‘s stake in TSMC only a few months after buying it in 2022.
To be honest, China’s repeated promise/threat to reunify Taiwan has always put me off the shares. It remains a constant risk.
Yet TSMC manufactures all Nvidia’s most-advanced chips, so adverse political developments would also be disastrous for the latter’s share price. But I continue to hold Nvidia shares, which are also much more expensive.
The fact is, no product is more central to international trade today than semiconductors. The supply chain disruption caused by an invasion would affect nearly every industry, from AI and gaming to telecommunications and car manufacturing.
So I see this risk as one for the whole global economy, not solely TSMC.
Manufacturing diversification
Furthermore, the company is due to open a new fabrication plant in the US next year and a second in Japan. Reports say it might build a third plant in Japan to make cutting-edge 3-nanometer chips.
This geographic diversification should help de-risk the investment case moving forward.
Image source: TSMC
A league of its own
Sitting at the heart of the semiconductor industry, TSMC should benefit directly from the AI revolution. And though less than 10% of its revenue currently comes from AI chips, this market is forecast to grow at a near-50% compound annual growth rate in the next five years.
Even Warren Buffett said that “there’s no one in the chip industry that’s in [TSMC’s] league, at least in my view.”
Unlike the Oracle of Omaha, I don’t have to worry about losing money for shareholders. This means I’m willing to stomach a bit more risk when pursuing market-beating returns.
Therefore, I’ve decided to add the stock to my portfolio, with a minimum five-year holding period in mind.
The post 1 dirt cheap artificial intelligence (AI) stock to buy in 2024 appeared first on The Motley Fool UK.
Should you buy Taiwan Semiconductor Manufacturing now?
Don’t make any big decisions yet.
Because Mark Rogers — The Motley Fool UK’s Director of Investing — has revealed 5 Shares for the Future of Energy.
And he believes they could bring spectacular returns over the next decade.
Since the war in Ukraine, nations everywhere are scrambling for energy independence, he says. Meanwhile, they’re hellbent on achieving net zero emissions. No guarantees, but history shows…
When such enormous changes hit a big industry, informed investors can potentially get rich.
So, with his new report, Mark’s aiming to put more investors in this enviable position.
Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!
Grab your FREE Energy recommendation now
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#FFFFFF”, ‘color’, ‘#FFFFFF’);
})()
More reading
Here’s what I think will happen to the Rolls-Royce share price in 2024
£5k of savings? I’d turn that into a lifetime of passive income with these simple steps
I’d buy these UK shares to start earning a second income
Legal & General shares could return 20% this year
2 FTSE 250 stocks starting the year at 52-week highs
Ben McPoland has positions in Apple, Nvidia, and Tesla. The Motley Fool UK has recommended Apple, Nvidia, Taiwan Semiconductor Manufacturing, and Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
