Considering how well artificial intelligence (AI) stocks have done over the past two years, it's hard to imagine some of them going even higher. However, this industry still has significant tailwinds as we have barely scratched the surface of what is possible with AI.
However, picking which companies will emerge as the victors in the AI arms race isn't easy. That's why I'm focusing more on the companies selling the tools needed to participate in this AI arms race. One of the top companies in this realm is Taiwan Semiconductor (TSM +6.30%). Although the stock was up 90% in 2024, it still has plenty of room for upside in 2025.
Taiwan Semi is a key player in the AI arms race
Although many companies design chips and use them in their own products -- think Nvidia (NVDA +5.93%) or Apple (AAPL +1.18%) -- not all of them have the manufacturing infrastructure to actually churn out those chips. Instead, they outsource this work to foundries like Taiwan Semiconductor. This puts Taiwan Semiconductor in a neutral position in the AI arms race. As the world's largest foundry operator, it often fabricates chips for competitors.
One market segment where this is evident is the graphics processing unit (GPU) space. GPUs have long been used for specific types of arduous computing tasks that can be best handled by parallel processors, and training AI models creates just this type of workload. Nvidia has dominated this market. However, it does have competition, such as AMD (AMD +18.37%). And TSMC also fabricates AMD's GPU chips.
NYSE: TSM
Key Data Points
This makes TSMC a top AI investment for me, as it allows me to invest in a fairly low-level company that provides products to many of the top AI players. It's expected to report that its AI-related revenue tripled in 2024, and there are no indications that its growth will plateau anytime soon.
Furthermore, Taiwan Semiconductor will introduce a new fabrication technology later on in 2025 that will drive further sales growth. Its 2-nanometer (nm) process node will set a new performance benchmark over its current top-of-the-line 3nm process node. The biggest advancements for the chips made using this process won't be in processing power but in energy efficiency. Management estimates that these 2nm chips will be 25% to 30% more energy efficient than the current generation when each is configured for the same power level. That's a massive benefit, and will be a key feature for chips in products like smartphones (where they will enable longer battery life) and data centers (where GPUs consume a ton of power).
There's a clear case for owning Taiwan Semiconductor stock, but do the financials support the premise that it could rocket higher in 2025?
Growth will likely be strong for Taiwan Semi in 2025
Taiwan Semiconductor produced strong growth in Q3, with revenue rising 39% year over year in New Taiwan dollars. While we'll hear more about TSMC's Q4 performance on Jan. 16 when it reports its next set of results, we already have an idea of its revenue growth.
Taiwan Semi reports monthly revenues to investors, and the results for the last three months of the year were fantastic.
| Month | Revenue | YOY Growth |
|---|---|---|
| October | NT$314.240 billion | 29% |
| November | NT$276.058 billion | 34% |
| December | NT$278.163 billion | 58% |
Data source: Taiwan Semiconductor. YOY = year over year. Current exchange rate is approximately $1 U.S. to NT$33.
Revenue growth is clearly strong, and these numbers indicate 39% year-over-year revenue growth from a New Taiwan dollar standpoint.
Wall Street analysts expect this strength to continue throughout 2025, as they project 26% growth. If the stock is priced right today, it could therefore see strong appreciation driven by its business growth. Trading at 23 times forward earnings, TSMC isn't really that expensive.
TSM PE Ratio (Forward) data by YCharts.
Considering that the S&P 500 (^GSPC +1.46%) trades for 23.4 times forward earnings, Taiwan Semi is reasonably priced and primed for more upside in 2025.
Taiwan Semiconductor is a massive player in a key industry, and its leadership position will make it a worthwhile investment. The stock is well priced and the company is showing promising growth, so I have no doubt that it will rocket higher in 2025.
