The hottest large-cap stock over the past the past five years is undoubtedly Nvidia (NVDA 1.26%), which is up over 2,900% during that stretch. However, if you missed out on Nvidia, there is another stock in the semiconductor space that looks like it could be a nice winner in the years ahead: Taiwan Semiconductor Manufacturing (TSM 0.84%), or TSMC for short.
Let's look at why TSMC could be a big winner over the next few years.
An AI infrastructure buildout winner
As the largest semiconductor contract manufacturer in the world, TSMC plays a vital role in the ongoing buildout of artificial intelligence (AI) infrastructure. Today, many top semiconductor companies use what is known as a fabless model, which basically just means that they design the chips but they don't manufacture them. Fabs, also known as foundries, are chip manufacturing facilities. That's where Taiwan Semiconductor comes in.
As such, many of the largest companies in the world that design chips are TSMC customers. This includes many traditional semiconductor companies such Nvidia, Advanced Micro Devices, and Broadcom. However, its largest customer is Apple, which designs its own chips to power its devices and uses TSMC to manufacture them.
Not surprisingly, with the huge demand Nvidia has been seeing for its graphic processing units (GPUs), TSMC has been benefiting as well. The company is also well positioned to benefit from other companies looking to make inroads into this market. AMD is generating a fraction of the revenue Nvidia is from GPUs, but the company just made an acquisition to help it become more competitive in the space. Meanwhile, non-traditional chip companies like Amazon and Alphabet have also developed their own lower-cost AI chips in an effort to get into the market -- and they need help making physical chips out of their designs.
At the same time, demand generally continues to outstrip supply for the hottest AI chips, with TSMC working hard to try to increase capacity to meet this rising demand. With the tight market and numerous companies looking to gain capacity at its foundries, TSMC is well positioned.
The company has already indicated that it will consider increasing prices next year on its more advanced technologies. According to Morgan Stanley analysts, prices for its 4 nanometer and 5nm wafers are projected to increase by 10% to 11% next year, while its newer 3nm technology could see a 4% increase in price.
The company has already been seeing strong growth, with second-quarter revenue up 33% in U.S. dollars to $20.8 billion. Meanwhile, it recently announced that revenue for the month of July soared nearly 45% in New Taiwan dollars.
TSMC has a lot of leverage given the current market conditions, and the combination of increasing capacity and price hikes set the company up to perform even better next year and beyond.
Image source: Getty Images.
Time to buy the stock
TSMC has a lot of growth ahead of it with the AI infrastructure buildout still looking to be in its early days. Commentary from the large cloud computing companies and others like Meta Platforms indicate that AI will only need more computing power as the technology advances. Meta, for example, said it's likely that its Llama 4 large language model would need 10 times the compute power to train as its prior AI model.
All that computing power means the need for more chips, which will just continue to benefit TSMC. Meanwhile, it is set up to be a winner even if competitors were to eventually challenge Nvidia's dominance. Most of Nvidia's current and potential rivals are fabless designers, too.
Trading at a forward price-to-earnings (P/E) ratio of just over 20.5 times and a price/earnings-to-growth ratio (PEG ratio) of under 1, TSMC is attractively priced for the growth it has in front of it over the next few years.
TSM PE Ratio (Forward 1y) data by YCharts
If you missed out on Nvidia's dazzling rise and are afraid to buy the soaring stock, or you are just looking for another way to play the AI infrastructure buildout, TSMC is a strong AI hardware investment to consider at current levels.
