When investors debate the future of the artificial intelligence (AI) trade, the conversation generally finds its way back to the usual suspects: Nvidia, Advanced Micro Devices, and cloud hyperscalers like Microsoft, Amazon, and Alphabet.
Each of these companies is racing to design GPUs or develop custom accelerators in-house. But behind this hardware, there's a company that benefits no matter which chip brand comes out ahead: Taiwan Semiconductor Manufacturing (TSM 1.26%).
Let's unpack why Taiwan Semi is my top AI chip stock over the next 10 years, and assess whether now is an opportune time to scoop up some shares.
NYSE: TSM
Key Data Points
Agnostic to the winner, leveraged to the trend
As the world's leading semiconductor foundry, TSMC manufactures chips for nearly every major AI developer -- from Nvidia and AMD to Amazon's custom silicon initiatives, dubbed Trainium and Inferentia.
Unlike many of its peers in the chip space that rely on new product cycles to spur demand, Taiwan Semi's business model is fundamentally agnostic. Whether demand is allocated toward GPUs, accelerators, or specialized cloud silicon, all roads lead back to TSMC's fabrication capabilities.
With nearly 70% market share in the global foundry space, Taiwan Semi's dominance is hard to ignore. Such a commanding lead over the competition provides the company with unmatched structural demand visibility -- a trend that appears to be accelerating as AI infrastructure spend remains on the rise.
Image source: Getty Images.
Scaling with more sophisticated AI applications
At the moment, AI development is still concentrated on training and refining large language models (LLMs) and embedding them into downstream software applications.
The next wave of AI will expand into far more diverse and demanding use cases -- autonomous systems, robotics, and quantum computing remain in their infancy. At scale, these workloads will place greater demands on silicon than today's chips can support.
Meeting these demands doesn't simply require additional investments in chips. Rather, it requires chips engineered for new levels of efficiency, performance, and power management. This is where TSMC's competitive advantages begin to compound.
With each successive generation of process technology, the company has a unique opportunity to widen the performance gap between itself and rivals like Samsung or Intel.
Since Taiwan Semi already has such a large footprint in the foundry landscape, next-generation design complexities give the company a chance to further lock in deeper, stickier customer relationships.
TSMC's valuation and the case for expansion
Taiwan Semi may trade at a forward price-to-earnings (P/E) ratio of 24, but dismissing the stock as "expensive" overlooks the company's extraordinary positioning in the AI realm. To me, the company's valuation reflects a robust growth outlook, improving earnings prospects, and a declining risk premium.
TSM PE Ratio (Forward) data by YCharts
Unlike many of its semiconductor peers, which are vulnerable to cyclicality headwinds, TSMC has become an indispensable utility for many of the world's largest AI developers, evolving into one of the backbones of the ongoing infrastructure boom.
The scale of investment behind current AI infrastructure is jaw-dropping. Hyperscalers are investing staggering sums to expand and modernize data centers, and at the heart of each new buildout is an unrelenting demand for more chips. Moreover, each of these companies is exploring more advanced use cases that will, at some point, require next-generation processing capabilities.
These dynamics position Taiwan Semi at the crossroad of immediate growth and enduring long-term expansion, as AI infrastructure swiftly evolves from a constant driver of growth today into a multidecade secular theme.
TSMC's manufacturing dominance ensures that its services will continue to witness robust demand for years to come. For this reason, I think Taiwan Semi is positioned to experience further valuation expansion over the next decade as the infrastructure chapter of the AI story continues to unfold.
While there are many great opportunities in the chip space, TSMC stands alone. I see it as perhaps the most unique, durable semiconductor stock to own amid a volatile technology landscape over the next several years.
