Over the last couple of years, semiconductor stocks have been some of the biggest beneficiaries of the market's newest megatrend, artificial intelligence (AI). In particular, suppliers of graphics processing units (GPUs) to data centers such as Nvidia and Broadcom have witnessed abnormally high gains relative to those seen across the S&P 500 and Nasdaq Composite.
In the background, however, foundry specialist Taiwan Semiconductor Manufacturing (TSM 4.96%) -- known as TSMC -- has quietly emerged as a leader in the chip space in its own right. The best part? The stock is still dirt cheap. Here's why I think Taiwan Semi will turn out to be the top-performing chip stock over the next 10 years.
NYSE: TSM
Key Data Points
Why TSMC looks primed to thrive
Data center GPUs are important pieces of hardware powering all sorts of exciting generative AI applications. In this sense, companies such as Nvidia, Broadcom, and Advanced Micro Devices should all be considered leaders when it comes to use cases such as training large language models (LLMs) or machine learning.
What you may not know, however, is that each of these companies relies heavily on Taiwan Semi to actually manufacture their chipware. TSMC specializes in foundry services, making chipsets for many different semiconductor providers that span use cases across computing, mobile devices, cloud infrastructure, and more.
While this makes the case for Taiwan Semi's current picture, it's the future prospects that have more even more intrigued. According to Precedence Research, the total addressable market (TAM) for AI chips is expected to reach nearly $1 trillion by 2034 -- roughly 10 times its current estimated size.
When you also consider that cloud hyperscalers such as Amazon, Alphabet, and Microsoft are all expected to spend north of $200 billion on chips just in 2025, I think it becomes increasingly feasible that the AI chip market will be expanding exponentially over the next several years.
TSM Revenue (Quarterly) data by YCharts.
The idea to understand here is that surging demand for chips from Nvidia and its peers bodes particularly well for Taiwan Semi, since the company is deeply embedded in the ecosystems of many leading semiconductor companies. Just to emphasize how important TSMC is for other chip companies, consider that it accounts for more than 60% of the chip manufacturing market -- absolutely trouncing competitors such as Intel and Samsung.
Image source: Getty Images.
Why I think TSMC will generate higher returns than Nvidia
The chart below illustrates the share price returns between Nvidia and TSMC over the last couple of years. While Taiwan Semi stock has produced market-beating returns, it's not even close to what Nvidia investors have experienced.
Even though the AI chip market is projected to continue growing, I think increased competition from AMD and custom silicon providers used by the hyperscalers will become a headwind for Nvidia in the next few years. In contrast, Taiwan Semi is in a position to actually benefit from rising competition in the chip space.
For this reason, I actually think TSMC's revenue and earnings acceleration will continue climbing. Nevertheless, TSMC is trading at a forward price-to-earnings (P/E) multiple of 22.6 -- quite close to the average forward P/E of the S&P 500, which sits at 20.9.
In my eyes, TSMC is sitting in a lucrative position to continue expanding its reach in the foundry industry. The growing market for chips, underscored by rising competition in the AI realm, has me bullish that an investment in Taiwan Semi will indeed produce superior returns to the S&P 500 in the long run.
However, I think TSMC stock is yet to have its "Nvidia moment," so to speak. For all these reasons, I think the stock is a no-brainer opportunity, trading for a bargain. Investors with a long-term time horizon may want to consider scooping up shares of TSMC right now and holding on tightly.
