NVIDIA (NASDAQ: NVDA) is the world’s hottest artificial intelligence (AI) stock. Up 504% since AI mania kicked off in early 2023, it has outperformed every major stock market index. If you’d invested $10,000 in NVIDIA at the start of the 2023 bull market and held to today, you’d be sitting on a $60,400 position. On top of that, you’d have earned a little bit of dividend income.
By now, most North American investors have decided whether they are bullish or bearish on the “company of the hour.” The discussion about indirect ways to gain exposure is more interesting. On that topic, there is still some low-hanging fruit. In this article, I will explore my personal favourite AI stock in 2024.
Taiwan Semiconductor
Taiwan Semiconductor Manufacturing (NYSE: TSM) is NVIDIA’s contract manufacturer. It has a piece of NVIDIA’s generative AI action. It also enjoys a solid book of business from Apple and chip companies like AMD, Qualcomm, and Broadcomm.
How has TSM acquired such an illustrious book of business? One factor is first-mover advantage: it was the first company ever to think of and implement the business model of exclusively manufacturing chips. Before TSM, companies designed and built their own chips. Later, other companies got into the contract foundry business. However, because they also designed chips, their priorities were divided between fulfilling their own orders and fulfilling client orders. It created a kind of conflict of interest. This fact made TSM the go-to semiconductor foundry, allowing it to lock in contracts from basically all the big chip companies.
The only large, pure play foundry
As a result of its first-mover advantage and its competitors’ lack of focus, TSM is today the world’s only large pure play foundry. GlobalFoundries is somewhat similar – it’s mostly a manufacturer, designing its own products being a small part of its business. However, it’s a relatively small player, doing $7 billion a year in revenue to TSM’s $70.2 billion. It wouldn’t be able to handle the massive orders clients like Apple make.
Valuation
Despite its innumerable advantages, TSM stock is not especially expensive. Or I should say, wasn’t especially expensive when I started buying it. It was at 15 times earnings then; it’s at 28 times earnings now. This doesn’t diminish my enthusiasm for the stock. I sold all my shares at $120 (huge mistake), and later jumped on the opportunity to get back in at $130. I don’t think TSM is at an unreasonable valuation today given its growth prospects.
A similar Canadian stock
If you’re looking for a Canadian stock similar to TSM, you could consider something like Kinaxis (TSX: KXS). It’s not a chip stock, but an AI stock and – let’s be honest – it’s the AI thing more than the chip thing that has investors going crazy for NVIDIA this year. Kinaxis shares one advantage with TSM and NVIDIA: it’s the go-to supplier of an AI-related product. In TSM’s and NVIDIA’s cases it’s AI chips, in KXS’s case it’s AI-powered supply chain management software. According to a manufacturing manager I spoke to, RapidResponse is the industry standard in supply chain management. Further research indicated this manager was correct: SAP is its only real competitor, and its reviews are not as good as RapidResponse’s reviews. So, if you’re looking for a Canadian AI stock, KXS is worth researching further.
