I think this stock should replace it in the “Magnificent Seven”

By | March 16, 2024

There’s no doubt about that Amazon (NASDAQ: AMZN) has been a technology dynamo for much of its history, delivering monster returns to its long-term investors.

However, recently the company’s results have been mixed. Yes, Amazon’s shares have nearly doubled in the past year, but that’s only because they fell so far during the 2022 bear market. Amazon still hasn’t surpassed its 2021 peak even as the S&P500 And Nasdaq Composite are back on track to new all-time highs.

While Amazon’s recent results are solid, there are also signs that the company is losing its edge. Revenue growth at its cloud computing business, Amazon Web Services, has slowed significantly, to 13% in the fourth quarter, well behind its two biggest rivals, Microsoft Azure and Alphabet‘s Google Cloud. E-commerce growth has slowed at a similar pace and is even being overtaken Walmart.

Amazon also appears to have gotten off to a slow start in the artificial intelligence (AI) race. It followed Alphabet in making a multibillion-dollar investment in Anthropic AI in September, although that move appeared intended to compensate for its previous lack of strategy.

Amazon is a member of the ‘Magnificent Seven’, the group of the world’s most valuable technology companies. These seven contributed the largest share to the total price growth of the market last year. However, Amazon’s biggest innovations could be behind it. CEO Andy Jassy appears to have switched from experimentation to a focus on profitability, which could make the company weaker in the long run. For example, the market’s vendors are in turmoil over a new set of fees that have prompted a Federal Trade Commission investigation.

There is one company that is on the cutting edge of technology that I believe would be a good candidate to replace Amazon in the Magnificent Seven Taiwanese semiconductor manufacturing company (NYSE: TSM).

Different stock graphs on top of each other.

Image source: Getty Images.

Possibly the most important company in the world

It is no exaggeration to call Taiwan Semiconductor Manufacturing – also known as TSMC – the most important company in the world. It is the largest chip manufacturer in the world. The company handles about 55% of contract chip production and 90% of the most advanced chips, and that share could be even higher.

TSMC is the company that tech giants love Apple, Nvidia, Broadcom, Advanced micro devices, and even Amazon is turning to manufacturing their chips, giving it enormous market power. No other company would likely impact the world more if it ceased operations today.

TSMC’s market power is also visible in the results. In the fourth quarter, the company generated $8.2 billion in operating income on $19.6 billion in sales, giving it an operating margin of 42%, a clear demonstration of its pricing power.

TSMC is also vital to generative AI technology, as companies like Nvidia rely on it to produce cutting-edge graphics processing units (GPUs) and other chips that can power and train generative AI applications like ChatGPT. Demand for these chips far exceeds supply, which should boost profits at TSMC even further.

There is a clear need to expand chip production, and TSMC has planned new foundries in the US and other parts of the world. However, US expansion is facing challenges for several companies, showing that ramping up chip production, especially the most advanced ones, won’t be easy.

Why TSMC should join the Magnificent Seven

TSMC is not a US-based company like the rest of the Magnificent Seven. Yet in the US it is listed on the New York Stock Exchange. With a market cap of $721 billion as of March 11, it is now more valuable than Teslameaning that based on its size it would qualify for a spot in the group.

However, the best reason to include TSMC in the Magnificent Seven is that it represents the future of technology. It is the dominant supplier of AI chips and other advanced processors and will almost certainly remain so.

The company has returned to revenue growth after the last cyclical downturn in the chip industry, and investors recognize its crucial position in the AI ​​supply chain: the stock is up 34% year to date.

TSMC seems like a good bet to outperform Amazon and other members of the Magnificent Seven for the rest of the year. It deserves a place in the elite group of technology stocks.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Jeremy Bowman has positions in Amazon and Broadcom. The Motley Fool holds positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Microsoft, Nvidia, Taiwan Semiconductor Manufacturing, Tesla, and Walmart. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.

Forget Amazon: I Think This Stock Should Replace It in the “Magnificent Seven” was originally published by The Motley Fool

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