Taiwan Semiconductor is one of the unsung winners of the AI megatrend.
Finding top growth stocks and holding them while they capture their market opportunity is a fairly simple investing strategy that has worked for decades. The key is to identify a major growth trend and invest in a company that’s a leader in that area.
There are few bigger trends in the stock market right now than artificial intelligence. AI hyperscalers are spending hundreds of billions of dollars to build out their computing capacity, and several companies are beneficiaries of that trend.
One example is Taiwan Semiconductor (TSM +0.90%), the world’s largest chip foundry. Also known as TSMC, the company is slated to make a ton of money from this buildout. It’s one of my top growth stocks to buy and hold right now, and investors should scoop up shares before it goes on another monster run.
Image source: Getty Images.
Taiwan Semiconductor’s market position makes it a top winner of the AI boom
Several companies are competing to provide the most powerful computing hardware for AI applications. So far, the primary winner has been Nvidia with its dominant line of graphics processing units (GPUs) designed specifically for AI workloads. However, Broadcom and AMD are also making big strides with each offering compelling alternatives in the high-performance computing space.
Regardless of which processor ultimately powers the AI industry, the chips likely trace back to Taiwan Semiconductor. There isn’t a lot of competition at the cutting edge of chip production, mainly because TSMC has beaten out so many competitors thanks to its superior manufacturing capabilities. That doesn’t look to be changing anytime soon, and with the company launching a new chip node, that trend is continuing.
Taiwan Semiconductor Manufacturing
Today’s Change
(0.90%) $2.55
Current Price
$284.75
Key Data Points
Market Cap
$1477B
Day’s Range
$273.25 – $286.83
52wk Range
$134.25 – $311.37
Volume
666K
Avg Vol
13M
Gross Margin
58.06%
Dividend Yield
0.01%
One emerging problem in the AI buildout is energy consumption. It’s no secret that AI data centers are energy hogs that are driving up energy prices around the U.S. Furthermore, there may come a time when data centers aren’t able to come online due to a lack of energy on the grid.
There are several ways around this problem, and TSMC has one of its own. Its new 2 nanometer (nm) process node, which is entering production right now, offers 25% to 30% less energy consumption when configured to run at the same performance levels as previous generation 3 nm chips. These are significant performance gains, and they should allow AI hyperscalers to build data centers to expand compute capacity while reducing the growth in energy use.
With TSMC launching products that will help address one of the biggest obstacles to the AI buildout, I’m quite bullish on its future. And with chip demand so high, the company’s revenue is rising rapidly, yet the stock doesn’t trade for as high a premium as many of its fast-growing peers in the semiconductor industry.
Taiwan Semiconductor’s stock doesn’t carry a premium price tag
During Q3, TSMC’s revenue rose 41% year over year in U.S. dollars. That places it among the fastest growing companies in the AI arms race, yet it trades at a price tag that is in line with the broad market.
With a price-to-earnings ratio of 29, TSMC represents only a small premium to the S&P 500, which trades at 28 times earnings. That is very attractive given the growth it’s reporting quarter after quarter.
Data by YCharts.
Taiwan Semiconductor is supplying the advanced chips needed by AI hyperscalers. For investors who are bullish on rising chip demand over the next few years, TSMC is a top candidate for a buy-and-hold stock.
Keithen Drury has positions in Broadcom, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.