Palantir Technologies stock has been on a monster run since going public in 2020, with shares up close to 1,000%. I am here to tell you the stock is now overvalued. Shares of Palantir currently trade at a trailing price-to-sales (P/S) ratio of 79. No matter how fast the company grows its artificial intelligence (AI) services, the stock will take decades to catch up to this extreme valuation.
If not Palantir, which AI stocks are set up for success over the next few years? One of my top choices is Taiwan Semiconductor Manufacturing (TSM +1.32%). Known simply as TSMC, the manufacturer of computer chips can help set investors up for life who buy today. Here's why.
The backbone of AI computer chip development
The leading AI chipmaker is Nvidia, with over $100 billion in annual revenue in 2024. However, Nvidia doesn't make its own computer chips. It leaves the dirty work to TSMC, which is a third-party provider of manufacturing and assembly for semiconductors, and the leading player in this space by a wide margin. Without TSMC, Nvidia would not be able to sell its advanced AI chips at its current scale.
Rapid growth in spending on AI computer chips has led to an increase in demand for TSMC's factories, which are pumping out chips as fast as they reasonably can. Revenue grew to $90 billion on the back of this increase in demand, with revenue from TSMC's High-Performance Computing segment growing a blistering 58% year over year in 2024.
Management expects this growth to continue in 2025. Over half of TSMC's revenue now comes from cloud and AI customers, with the company taking market share from semiconductor manufacturing competitors such as Intel. This is is a nice growth runway that could help accelerate consolidated revenue growth this year.
NYSE: TSM
Key Data Points
Long runway for growth, geographical diversification
The long-term looks even sweeter for TSMC. Demand for AI computer chips, cloud computing, and other semiconductor-intensive activities keeps growing, while the overall chip market is expected to reach $1 trillion in annual sales by 2030.
Analysts and other industry players such as ASML believe that 40% of revenue will come from AI computer chips by 2030, or $400 billion in annual sales. Not all of these sales will flow to TSMC, but they should provide a fantastic long-term tailwind for the leader in the space. I expect TSMC's revenue to surpass $100 billion in 2025 and keep marching higher for the rest of the decade.
Management at TSMC has a history of thinking for the long haul to help create a more robust business. Today, it is working to diversify its geographical footprint for its manufacturing facilities, which are now centered in Taiwan. Taiwan is under threat from China, which keeps stating it will reclaim the island and regularly practices amphibious invasions of the nation. TSMC can't control what China does, but it can prepare for any dour scenario if it actually occurs. The company has built a factory in the United States and plans to spend a total of $165 billion building manufacturing plants in the country.
TSM PE Ratio data by YCharts.
The stock trades at a reasonable price
Despite this durable growth runway and further plans for geographic diversification, investors can still pick up shares of TSMC at a reasonable level with a price-to-earnings (P/E) ratio below the S&P 500 index. It trades at a trailing P/E of 24.6 vs. the S&P 500 index average P/E of 28.5.
Over the last five years, TSMC's net income has grown by 179%. I think the company can at least grow earnings by 100% -- if not more -- through 2030, which would bring the P/E down to 12. That is a much too cheap level for a high-quality business with a dominant position in its field like TSMC. From my seat, this makes the stock an easy buy at today's levels. TSMC is the backbone of the AI market. Without it, the industry would have an extreme shortage of advanced computer chips.
Let the stock be the backbone of your portfolio as well.
