The technology sector has faced quite a bit of pressure so far in 2025. Just two months ago, the Nasdaq Composite was down over 20% year to date following President Trump's "Liberation Day" tariff announcement on April 2. Only after a steep recovery since late April has the index been able to return to breakeven.
In this volatile environment, some tech stocks are still trading at attractive valuations, and Taiwan Semiconductor Manufacturing (TSM 1.03%) stands out in the sea of enticing artificial intelligence (AI) stocks. Could it be the best bargain in the market right now?
Why is Taiwan Semiconductor so important for AI development?
When it comes to AI semiconductor stocks, there is no shortage of positive narratives surrounding the usual suspects: Nvidia, Advanced Micro Devices, and Broadcom. These companies design graphics processing units (GPU) and integrated network equipment for data centers. This hardware is essential for developing generative AI applications, and megacap behemoths such as Microsoft, Alphabet, Amazon, and Meta Platforms can't seem to buy enough of it.
But Nvidia, Advanced Micro Devices, and Broadcom are "fabless" chip companies -- they don't physically make their own chips. They outsource that part of the process to companies like Taiwan Semiconductor, also known as TSMC, which turn their GPU designs into actual tangible products.
When it comes to foundry services, TSMC competes with smaller players such as United Microelectronics and GlobalFoundries, as well as the likes of Intel and Samsung, which are integrated device manufacturers (i.e., they handle design, fabrication, and assembly in house). However, given that TSMC has an estimated market share of nearly 60% in the third-party foundry segment, competitors have a long, uphill climb to catch up to its leading fabrication operation.
Image Source: Getty Images.
What catalysts does Taiwan Semi have?
According to a recent report from global management consulting firm McKinsey & Company, data center spending could reach $6.7 trillion over the next five years, and $5.2 trillion of that amount will go to AI-related infrastructure with the following breakdown:
| Category | Dollars Allocated | Spending Percentage |
|---|---|---|
| Builders | $800 billion | 15% |
| Energizers | $1.3 trillion | 25% |
| Technology developers and designers | $3.1 trillion | 60% |
| Total | $5.2 trillion | 100% |
Data Source: McKinsey & Company
Per McKinsey's analysis, the "technology developers and designers" with the largest allocation above include "semiconductor firms and IT suppliers producing chips and computing hardware for data centers".
The incredible demand for GPUs and data center equipment in the rest of this decade will be a major tailwind for TSMC, given how much Nvidia, AMD, Broadcom, and other chip designers rely on its foundry capabilities. Analysts' forecasts of the company's revenue and earnings reflect its robust growth prospects:
Data by YCharts.
Is Taiwan Semiconductor stock a good buy right now?
TSMC's forward-price-to-earnings (P/E) multiple has compressed considerably over the last year.
Data by YCharts.
My suspicion is that investors have been spooked by the possibility of new tariffs hurting chip demand. Moreover, geopolitical concerns relating to China's threats toward Taiwan are also likely priced into TSMC stock as well.
Although both of these concerns are valid, I see them as near-term headwinds. Meanwhile, AI's largest developers still plan to spend heavily on infrastructure for many years, regardless of this uncertainty.
In addition, TSMC has taken a proactive approach to geographic expansion, making significant investments in new manufacturing facilities in the U.S. and Europe.
Lastly, Taiwan Semi's forward P/E is the lowest among the AI semiconductor stocks in its peer group. I find this interesting, as Nvidia, Broadcom, and AMD are also vulnerable to new tariffs and geopolitical conflicts -- particularly in China. Nevertheless, investors appear to see those headwinds as more of a threat to TSMC's business than to its chip-designing clients.
These dynamics have created an opportunity for investors to buy shares of TSMC at a considerable discount to both its peers and its historical valuation levels. In my view, TSMC is trading at an absolute bargain level right now, and long-term investors should consider buying the stock hand over fist.
