TSMC looks set to be a big winner in AI infrastructure.
Nvidia is arguably the hottest large-cap stock of the past five years. (NVDA 4.55%)up more than 2,900% in that time period. But if you overlook Nvidia, there’s another stock in the semiconductor industry that could be a big winner over the next few years: Taiwan Semiconductor Manufacturing Co. (TSM 2.91%)abbreviated as TSMC.
Let’s take a look at why TSMC could be a big winner over the next few years.
Successful examples of AI infrastructure construction
As the world’s largest contract semiconductor manufacturer, TSMC plays a key role in the ongoing construction of artificial intelligence (AI) infrastructure. Many large semiconductor companies today operate under what’s called a fabless model, which basically means they only design chips but don’t manufacture them. A fab (also called a foundry) is a chip manufacturing facility. That’s where Taiwan Semiconductor comes in.
As a result, many of the world’s largest companies that design chips are TSMC’s customers. This includes many traditional semiconductor companies like Nvidia, Advanced Micro Devices, Broadcom, etc. However, its largest customer is Apple, which designs its own chips that power its devices and uses TSMC to manufacture them.
Not surprisingly, TSMC is also benefiting from surging demand for NVIDIA’s graphic processing units (GPUs). The company also stands to benefit from other companies looking to move into that market. AMD generates only a fraction of NVIDIA’s revenue from GPUs, but the company just made an acquisition to better compete in the space. Meanwhile, non-traditional chip companies like Amazon and Alphabet are also developing their own low-cost AI chips to get into the market, and they need help manufacturing physical chips from their designs.
At the same time, demand for the most popular AI chips continues to outstrip supply, and TSMC is working hard to ramp up production capacity to meet this growing demand. With a tight market and many companies looking to add to their foundry capacity, TSMC is well positioned.
The company has already said it will consider raising prices for its more advanced technologies next year: Morgan Stanley analysts expect prices for its 4- and 5-nanometer wafers to rise 10% to 11% next year, while prices for its newer 3-nanometer technology could rise 4%.
The company has already seen strong growth, with second-quarter revenues increasing 33% in U.S. dollar terms to $20.8 billion, while the company recently announced that July revenues jumped nearly 45% in Taiwanese dollar terms.
Given the current market conditions, TSMC has a lot of leverage, and the combination of increased capacity and higher prices should help the company perform even better next year and beyond.
Image source: Getty Images.
When to buy stocks
TSMC has big growth ahead of it, and it appears they are still in the early stages of building out their AI infrastructure. Comments from leading cloud computing companies and Meta Platforms say that AI will require more computing power as the technology advances. Meta, for example, said that training the Llama 4 large language model will likely require 10 times the computing power of previous AI models.
All that computing power means more chips are needed, which will continue to benefit TSMC. Meanwhile, even if competitors eventually challenge Nvidia’s dominance, TSMC is positioned to win: Most of Nvidia’s current and potential rivals are also fabless designers.
TSMC’s stock is trading at a forward price-to-earnings (P/E) ratio of just over 20.5 and a price-to-earnings growth (PEG) ratio of less than 1, making it attractively priced given its growth potential over the next few years.
TSM PE Ratio (1Y Ahead) data from YCharts
If you missed out on Nvidia’s impressive rise and are afraid to buy into the stock as it soars, or if you’re looking for another way to invest in AI infrastructure buildout, TSMC is a strong AI hardware investment to consider at current levels.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and public relations at Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jeffrey Saylor invests in Alphabet. The Motley Fool has invested in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Meta Platforms, NVIDIA, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
