Taiwan Semiconductor Manufacturing (TSM -1.76%) is one of the most valuable companies in the world at a market cap of $1.1 trillion, but it doesn't get the same level of attention that other big tech stocks get like Nvidia or Microsoft do.
Still, TSMC's competitive advantages can go toe to toe with any other stock, whether it's in the "Magnificent Seven" or not. On that note, let's take a look at 10 reasons to buy and hold this stock forever.
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1. It has dominant market share
TSMC is the clear leader in semiconductor manufacturing with roughly 67% market share, and an even higher share of advanced chips, estimated at roughly 90%. With that level of market share, TSMC has pricing power, and its customers have limited alternatives.
The company has gained that market share over time, and it's unlikely to erode anytime soon.
2. Demand for semiconductors will continue to grow
TSMC is in a great competitive position not just because of its dominant market share, but it's also benefiting from tremendous in its industry due to the growth of artificial intelligence (AI) and technology more broadly. That's a major reason why revenue jumped 42% in the first quarter, and future innovations should continue to drive chip demand.
3. It pioneered the contract foundry model
TSMC dominates the chip foundry industry in part because it was the first company to employ the third-party foundry model when it was founded in 1987. Over the years, that model has prevailed over the traditional integrated model.
4. It has top-level customers
TSMC's collection of customers helps show why the company is so dominant. Among its top customers are Apple, Nvidia, AMD, and Broadcom, cutting-edge chip-design companies and some of the most innovative companies in technology.
5. It has a huge profit margins
Profit margin is one of the clearest indicators of competitive advantage, and TSMC shines in that category. In the first quarter, the company reported an operating margin of 49%, showing it has pricing power and economies of scale.
6. It's getting government subsidies
TSMC is not only a dominant company in its own right, but its services are in such high demand as semiconductors are crucial for the global economy.
As part of the CHIPS Act, TSMC is receiving $6.6 billion in subsidies, and it's received $2 billion from the Chinese and Japanese governments in recent years.
7. It's historically undervalued
Considering its growth rate and competitive advantage, TSMC has been historically undervalued, and that seems to be the case today as it trades at a price-to-earnings ratio of 25, on par with the S&P 500.
8. It has a technological advantage
TSMC dominates the market for advanced chips, which it considers to be 7 nanometers (nm) or under. Those chips made up 73% of the company's revenue in the first quarter, and chips for high-performance computing, much of which is used for AI.
9. Its competition is struggling
The next two largest semiconductor manufacturers are Samsung and Intel and both of those companies have faltered of late. Samsung recently apologized to investors for not innovating enough and its poor performance.
Intel, meanwhile, is in the midst of a yearslong crisis. Its stock price has tumbled as the company is struggling to grow and deliver a profit.
10. It has a great track record
TSMC has outperformed the S&P 500 over virtually any time frame in its history. Over the last five years, the stock is up nearly 300% and 800% over the last decade.
Past performance doesn't guarantee future returns in the stock market, but winners tend to keep winning, and TSMC looks poised to do that.
