Artificial intelligence (AI) has dominated news feeds and financial headlines for much of the last few years after emerging as the market's newest obsession in late 2022 following OpenAI's release of ChatGPT.
Since then, investors have poured into stocks across a wide array of industries that touch AI in any form -- software, hardware, nuclear power, green energy, and crypto, among others.
As far as companies in the software and hardware spaces go, few have benefited more than Nvidia. Since ChatGPT's release on Nov. 30, 2022, its shares have climbed by nearly 680%. This meteoric rise added trillions to its market value, lifting it into the ranks of the world's most valuable companies.
While that trajectory might make Nvidia stock look like a tempting buy now, smart investors understand that share prices don't go up forever. I'll admit the tech company's future looks bright -- its latest quarterly results were great, and its new Blackwell chips have already become another multibillion-dollar business. But from its current market cap of nearly $3 trillion, I doubt it's possible for Nvidia to climb more than sevenfold again over the next several years (if ever).
By contrast, I see a lot more room for Taiwan Semiconductor Manufacturing (TSM 0.69%) to climb, and it's my top pick among the rich field of AI chip stocks.
NYSE: TSM
Key Data Points
Taiwan Semiconductor is the top player in the foundry business, and ...
Over the last few years, Nvidia, Advanced Micro Devices, Broadcom, and others have raked in hundreds of billions of dollars in revenue thanks to rising demand for graphics processing units (GPU) and data center network equipment. But designing these infrastructure systems is just one side of the equation. Actually manufacturing those products at scale is another matter, and that's where Taiwan Semiconductor, or TSMC, fits in.
TSMC specializes in fabrication services, and it's both the brains and the brawn when it comes to manufacturing advanced chips. Industry research estimates indicate that TSMC commanded a staggering 67% of the global third-party foundry market at the end of 2024.
As such, you shouldn't be surprised to hear that TSMC works closely with many of the tech sector's leading hardware developers -- including Nvidia, AMD, Broadcom, Amazon, OpenAI, Qualcomm, and Apple.
Image Source: Getty Images.
... the company could be on the verge of widening its lead
The chart below shows TSMC's quarterly revenues and gross profit margins over the last few years. Its accelerating sales growth is encouraging, but what I'm particularly impressed by is how it has widened its margins during a period of such rapid growth.
Data by YCharts.
Taking this a step further, TSMC is reinvesting its profits into expanding its capacity. It recently announced that it will follow up its ongoing $65 billion investment into building chip fabrication plants in Arizona with an additional $100 billion investment in research and development (R&D) and fabrication facilities in the U.S.
I see the company's expanding footprint in America as a direct move to strengthen its relationships with its existing customers, many of which are U.S.-based and play major roles in the AI narrative globally.
TSMC shares are trading for a bargain
2025 has gotten off to a bumpy start on Wall Street. As of this writing, the S&P 500 and Nasdaq Composite have fallen 4% and 8% year to date, respectively.
Within these indices, technology stocks have particularly struggled. Whether it was the short-lived DeepSeek sell-off or ongoing macroeconomic concerns surrounding Trump's new tariffs, many investors appear to be on a mission to stockpile cash. And what better way to do that than to sell shares and lock in the gains from tech growth stocks that have, for the most part, been on a tear over the last few years?
So far this year, shares of TSMC are down about 12%. While that might not seem like much, check out the trend in the graph below:
Data by YCharts.
TSMC's current forward price-to-earnings (P/E) ratio of 19.2 is nearly identical to the company's three-year average multiple. But in that time, it has emerged as the engine powering the broader AI chip industry. And given the high and rising levels of infrastructure spending on data centers and chips, as well as TSMC's aggressive expansion roadmap, the foundry giant's long-term prospects look bright. Yet despite the bullish secular trends providing the company's tailwinds, investors don't appear to be applying a premium valuation multiple to TSMC stock.
In my view, shares of TSMC are on sale. Those with long-term investment horizons may want to consider buying the stock hand over fist right now.
