This AI Stock Is a No-Brainer for Investors Focused on Real Profits

Core Viewpoint - The article discusses the investment potential of Taiwan Semiconductor Manufacturing Company (TSMC) and Nvidia, ultimately suggesting that Nvidia may be the smarter investment choice in the AI sector due to its superior free cash flow generation despite a higher valuation [2][12]. Group 1: TSMC Overview - TSMC is the world's largest contract chipmaker, generating $111.7 billion in revenue over the last 12 months with a net profit of $47.5 billion, resulting in a net profit margin of 42.5% [5]. - Analysts predict TSMC's profits will grow at nearly 21% annually over the next five years [5]. - TSMC's stock is priced at 21 times trailing earnings, and it offers a dividend yield of 1.8%, making it an attractive growth-at-a-reasonable-price (GARP) stock [6]. Group 2: TSMC's Capital Expenditures - TSMC has spent nearly $41 billion on capital expenditures over the last 12 months, more than double its spending five years ago [8]. - After accounting for capital expenditures, TSMC's actual free cash flow was $32.1 billion, indicating that for every $1 in reported profit, only $0.675 was generated in real cash profit [9]. Group 3: Nvidia Overview - Nvidia, valued at over $4.3 trillion, earned $76.8 billion in the last 12 months, resulting in a P/E ratio of 56.5, which is nearly three times that of TSMC [11]. - Nvidia's earnings are expected to grow at 30% annually over the next five years, which suggests a premium valuation [11]. Group 4: Nvidia's Free Cash Flow - Nvidia benefits from TSMC's capital investments, allowing it to convert a higher percentage of its reported net income into free cash flow, generating $72.1 billion in free cash flow, which is about 6% less than its reported net income [13]. - For every $1 in profit, Nvidia generates nearly $0.94 in real free cash flow, making it a more attractive option for investors seeking "real profits" [12][13]. Group 5: Investment Conclusion - Nvidia's stock is priced at nearly a 60x multiple based on free cash flow, which is considered fair value for high-growth tech stocks, with an EV/FCF/growth ratio of 2.0 [14]. - Despite its higher valuation, Nvidia is positioned as a top investment in the AI space, appealing to investors willing to pay a premium for quality [14].