Key Points
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Taiwan Semiconductor Manufacturing has diversified its global footprint.
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The stock is cheap for its projected growth rate.
Every decade, there seems to be a new investing trend that pops up. While some of these trends have real momentum behind them, others fizzle out before they can make a big impact. The primary investment theme over the past few years has undeniably been artificial intelligence (AI) investing. There have already been billions, if not trillions of dollars, spent on computing hardware to power AI workloads. By 2030, Nvidia expects annual data center spending to be $3 trillion to $4 trillion.
That’s a massive opportunity, and there are several ways to take advantage of it as an investor. One of my top investment ideas in the space is Taiwan Semiconductor Manufacturing (NYSE: TSM). The company is at the heart of the AI movement, as almost every computing unit deployed for AI workloads utilizes chips from its factories. This makes it a neutral way to play the AI arms race, as it doesn’t matter which computing units are being deployed; chances are, it’s filled with chips from Taiwan Semiconductor.
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I believe its stock is set to skyrocket over the next few years, and if you don’t already own shares, it’s not too late to buy.
Two investors celebrating a massive stock win.
Image source: Getty Images.
Taiwan Semiconductor is growing its global footprint
Taiwan Semiconductor makes logic chips, which are critical in all of the various AI computing units on the market today. There’s also only a handful of competitors in this space, mainly because it has such a massive lead in production capacity and footprint. The company has served its clients well over the past decade, and it has no reason to switch away.
One area of concern some investors and clients may have is its location. The island of Taiwan is located just off mainland China, and there have been rumors of China being willing to take military action to return Taiwan under tighter control. If something like that were to happen, the stock would certainly plummet, but it wouldn’t be in as bad a shape as it was a few years ago.
Taiwan Semiconductor has spent a lot of money building chip production facilities in other parts of the world, including Arizona, Germany, and Japan. In fact, Nvidia’s flagship GPU, the Blackwell, utilizes chips entirely produced in the U.S. While this is still a big risk, I think investors don’t need to worry about it as much as they used to.
On the AI chip front, Taiwan Semiconductor’s management expects monstrous growth over the next few years. AI chip revenue is expected to grow at nearly a 60% compound annual growth rate (CAGR) through 2029. That’s an incredible growth rate, and confirms projections like Nvidia’s when it says that a $3 trillion to $4 trillion annual market opportunity exists in AI. However, Taiwan Semiconductor isn’t all AI; it also has other uses, such as chips used in smartphones.
Overall, it believes it can grow its revenue at a 25% CAGR starting from 2024 and ending in 2029. For 2026, it expects a nearly a 30% revenue growth rate. This means that over the next few years, its growth rate will slowly decrease, but it will still likely be above 20% at the end of its projection in 2029. It’s rare to find a company that can deliver that level of growth for a sustained period, but it’s even more rare to find a stock that’s priced as well as Taiwan Semiconductor is.
Taiwan Semiconductor isn’t an expensive stock
Many big tech stocks trade for 25 to 30 times forward earnings and are growing revenue in the mid-teens double-digit range. Using that logic, you’d think Taiwan Semiconductor would be valued between 30 and 35 times forward earnings because its growth rate is in the mid-20% range, but you’d be wrong.
Taiwan Semiconductor’s stock trades for a pretty cheap 24 times forward earnings.
TSM PE Ratio (Forward) Chart
TSM PE Ratio (Forward) data by YCharts
This price tag, combined with its strong growth rate and a near-unstoppable growth trend, makes Taiwan Semiconductor a top stock to buy on the market. As long as there is increased AI spending, its stock will thrive. With AI spending not expected to slow down through at least 2030, it’s well-positioned to skyrocket over the next few years.
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Keithen Drury has positions in Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.