Taiwan Semiconductor Manufacturing Emerges as AI Chip Leader

The launch of ChatGPT on November 30, 2022, marked a significant turning point in the artificial intelligence (AI) landscape. Since that launch, shares of semiconductor company Nvidia have surged by an impressive 550%, elevating it to a multitrillion-dollar valuation. As semiconductor chips remain essential for AI advancements, investors are eager to spot promising growth opportunities beyond Nvidia.

Taiwan Semiconductor Manufacturing (NYSE: TSM) is positioned to become a key player in the AI chip market over the coming decade. Both its growth prospects and valuation trends make it an appealing option in the semiconductor industry right now.

Unveiling Taiwan Semi’s Role in Chip Production

Many investors are aware of companies like Nvidia, Advanced Micro Devices, and Broadcom, known for their advanced chipsets and data center infrastructure that support AI applications. However, the significant role that Taiwan Semi plays in chip manufacturing often goes unnoticed.

Major firms such as Nvidia, AMD, Broadcom, OpenAI, Amazon, and Qualcomm all depend on TSMC’s fabrication processes. Essentially, Taiwan Semi provides the engineering capabilities that turn the visions of the largest players in AI into reality.

Image source: Getty Images.

Promising Growth Ahead for TSMC

In 2024, TSMC reported sales of $88.3 billion and earnings of $6.81 per share. According to consensus estimates, Wall Street anticipates rapid revenue growth for the company in the upcoming years while it maintains solid profitability.

Data by YCharts.

The AI segment of the semiconductor market is anticipated to reach a size of $233 billion by 2034, according to Precedence Research. TSMC already commands over 60% of the foundry market, and with a strong lineup of industry-leading chip designers as clients, it is well-positioned to meet or even exceed the financial estimates mentioned above.

Investment Potential at an Attractive Valuation

Currently, TSMC trades at a price-to-earnings (P/E) ratio of 21, consistent with its 10-year average multiple.

Data by YCharts.

However, TSMC’s valuation has declined significantly over the past few months due to uncertainties surrounding new trade and tariff policies from the U.S. While the timing of potential changes to these policies remains unclear, many growth stocks appear undervalued at this moment. Tariffs may fluctuate, and concerns regarding their short-term impact on TSMC’s operations might be overblown, overshadowing the company’s long-term potential.

Investing in TSMC serves as a long-term bet on the demand for chips and expanding AI infrastructure. Regardless of which company’s chips are in high demand, TSMC stands to gain significantly.

Given the promising growth outlook for Taiwan Semi, the company’s stock appears to present a compelling opportunity at its current valuation, which remains aligned with its 10-year average and represents a discount compared to the S&P 500 index.

Should You Consider Investing $1,000 in TSMC Now?

Before making an investment in Taiwan Semiconductor Manufacturing, consider the following:

The Motley Fool analyst team recently highlighted what they believe are the 10 best stocks to buy right now, and TSMC did not make that list. The selected stocks have the potential for substantial returns over the coming years.

For context,* when Netflix was recommended on December 17, 2004, a $1,000 investment at that time would be worth approximately $623,685 today! Similarly, if Nvidia was recommended on April 15, 2005, that same investment would have grown to around $701,781.

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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. Adam Spatacco holds positions in Amazon and Nvidia. The Motley Fool recommends Advanced Micro Devices, Amazon, Nvidia, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool also recommends Broadcom and has a disclosure policy.

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