There's some hype in the artificial intelligence space right now, with some companies that have little revenue or earnings still seeing their share prices soar on hopes that their AI bets will eventually pay off. Meanwhile, there are companies that have long been tech leaders, slowly putting in the hard work of creating products that dominate in their respective markets.
Taiwan Semiconductor Manufacturing (TSM 1.92%), also called TSMC, is firmly in the latter category. The semiconductor manufacturing company is one of the world's most advanced processor foundries and is well-positioned to benefit from AI demand for years to come. Here are three reasons to buy this tech leader now.
Image source: Taiwan Semiconductor.
1. AI spending isn't slowing down any time soon
TSMC's most recent quarterly results show just how much the company is benefiting from the AI boom. The company's sales rose by 30% to $33.1 billion, and earnings increased 39% to $2.92 per American depositary receipt (ADR).
The strong results prompted TSMC's management to reaffirm that it expects AI data center revenue to grow at a compound annual rate in the mid-40% range through 2029. Taiwan Semiconductor CEO C.C. Wei said on the Q3 earnings call that "AI demand actually continues to be very strong and stronger than we thought three months ago."
Leading chip designer Nvidia believes AI data center spending could reach up to $4 trillion by 2030, and Morningstar research says that TSMC could continue to benefit from AI, the Internet of Things, and other advanced processor manufacturing "for decades." All of which means that TSMC may have many more years of growth ahead.
2. Its rivals are far behind
TSMC commands an estimated 90% market share of advanced processor manufacturing, which gives the company a massive opportunity to continue to benefit from the tech sector's increasing AI investments.
What's more, the company has an unparalleled position in chip manufacturing, with Samsung being its closest (yet still distant) rival. TSMC and Samsung are already producing 2nm advanced processors, but TSMC's yield rate for usable processors is at 60%, while Samsung has just 40% right now. In short, Samsung isn't nearly as efficient at making these new, advanced processors as Taiwan Semiconductor is.
Samsung management said recently that it was late in reading market trends and missed out on some early gains as a result. That could help TSMC maintain its lead in the advanced processor race for years to come.
NYSE: TSM
Key Data Points
3. Its shares are relatively inexpensive
Taiwan Semiconductor's stock has soared 363% over the past three years, but despite those gains, the stock is still relatively well-priced compared to its tech peers and the broader market. TSMC stock has a price-to-earnings ratio of about 31, which is on par with the P/E ratio of the S&P 500 index and far below the average of 51 for the tech sector.
Many AI stocks are frothy right now as some investors have grown increasingly optimistic about nearly any company that mentions it's dabbling in AI. In contrast, TSMC is benefiting immensely from AI on both its top and bottom lines, has concrete advantages in the market -- and yet its shares are still much cheaper than many AI stocks.
One thing to keep in mind with AI stocks right now
The impressive gains that many artificial intelligence stocks have experienced over the past few years have created a sentiment among investors that AI companies can't lose and their share prices are only likely to go up.
TSMC has strong revenue and earnings, and its position in manufacturing is unmatched. But that doesn't mean its stock will continue to rise at the same rate as it has over the past few years. I think the stock is a good long-term investment, but potential investors should know that gains from here on out could be more modest.
