While most people can name companies like Apple, Nvidia, or AMD, few can tell you who supplies their chips. All three entities are known as "fabless manufacturers," where they design and sell the products, then outsource the actual chip manufacturing to someone else.

When it comes to chips that must use cutting-edge technology for peak performance and efficiency, there's one place they go: Taiwan Semiconductor Manufacturing (TSM 2.31%). TSMC is one of the top semiconductor foundries in the world, yet it remains relatively under the radar. With the stock being undervalued currently, it's also a great time to buy. Read on to discover why Taiwan Semiconductor deserves a place in your portfolio.

Taiwan Semiconductor's capabilities are matched by few

What sets Taiwan Semiconductor apart from other foundries is its leading technology. Taiwan Semiconductor derives over half of its revenue from 5- and 7-nanometer (nm) chips, which are currently the most potent varieties on the market. But there's a new player on the block, which is sure to boost its revenue.

3nm chips represent the latest top design capabilities. The technology allows chip designers (like Apple or AMD) to pack 70% more logic processors onto the same area compared to 5nm chips, which provides up to 15% more speed while reducing power consumption by 30%. As of the fourth quarter, full-scale production has finally begun, but TSMC doesn't expect this segment to be a massive revenue contributor in 2023.

As designers adopt the technology, expect a significant revenue boost starting in 2024. With Samsung being the only other semiconductor foundry on earth with 3nm production capabilities, TSMC has positioned itself well.

Production worker examining a lot of chips.

Image source: Taiwan Semiconductor.

You'd think this news would boost Taiwan Semicondustor's stock, but it hasn't. Instead, the stock is down 35% from its all-time high because investors are worried about what the falling PC demand will do to the company in 2023. Judging by TSMC's 2023 revenue outlook, those fears may be warranted.

Currency conversions can severely affect TSMC's financials

Although revenue (in NT dollars) grew 43% year over year in Q4, it only grew 2% quarter over quarter, indicating a growth slowdown. Because TSMC provides investors with monthly updates, we can see how it's doing between quarters. For January and February, Taiwan Semicondcutor's revenue grew 13.8% year over year in NT dollars. Still, with currency effects, that is likely to look like decreasing revenue when TSMC reports earnings on April 20.

However, with Taiwan Semiconductor based in Taiwan, is it silly to convert its revenue to U.S. dollars and analyze its business that way? Yes and no.

Because TSMC is listed on the U.S. exchanges, it must report its financial results in U.S. currency. In practice, TSMC doesn't convert every NT dollar of revenue into U.S. dollars, so this comparison can be a bit foolish. However, with TSMC building a new $40 billion production facility in Arizona in part to take advantage of the CHIPS Act, this conversion will become more critical a few years down the road.

Investors should keep this in mind when digesting its first-quarter results, but it shouldn't distract you from how cheap the stock is.

The stock has a lot of near-term pessimism

Because of the weaker consumer, the demand for chips has fallen slightly. This has caused analysts to taper their earnings-per-share (EPS) expectations in 2023, with the average analyst expecting $5.53 in 2023 versus $6.56 in 2022. This has caused TMSC's trailing price-to-earnings (P/E) ratio to plummet to historic lows while its future P/E (utilizing analyst projections) stays elevated.

TSM PE Ratio Chart

TSM PE Ratio data by YCharts

However, the average analyst projection in 2024 is $6.93 per share, valuing the stock at 13 times 2024 earnings. As seen in the chart above, that's a sizable discount to its long-term average, and investors should pounce on the stock now.

While the stock might move sideways throughout 2023, it also pays a 2% dividend while investors wait for the growth to return in 2024.

So if 2024 will be so great, why should investors buy now? Most of the time, stocks move higher in anticipation of business growth, so the stock will likely move higher far before the calendar flips to 2024. With the stock trading at an attractive pricing point, it's an excellent idea to buy the dip in Taiwan Semiconductor's shares if you're willing to hold the stock for at least three to five years.