Taiwan Semiconductor Manufacturing (TSM +1.53%), the world's largest and most advanced contract chipmaker, is often considered the bellwether of the semiconductor market. Most of the top fabless chipmakers outsource the production of their top-tier chips to TSMC's industry-leading foundries.
Over the past five years, TSMC's stock rallied 265% as the Nasdaq Composite rose about 120%. It might be tempting to take some profits in TSMC after that market-beating run, but I believe it's smarter to buy this high-flying stock for five simple reasons.
Image source: Getty Images.
1. TSMC dominates the high-end chipmaking market
Over the past decade, TSMC deployed ASML's high-end extreme ultraviolet (EUV) lithography systems -- which are used to optically etch circuit patterns into silicon wafers -- before its two closest competitors, Samsung and Intel.
Those expensive upgrades helped TSMC pull ahead of its two rivals in the "process race" to manufacture smaller, denser, and more power-efficient chips. Meanwhile, other smaller foundries like UMC and GlobalFoundries dropped out of that race and focused on producing larger and older chips at lower prices.
TSMC now controls 71% of the global foundry market, according to Counterpoint Research. It also produces at least 90% of the world's most advanced chips. That market dominance makes it an irreplaceable linchpin of the global semiconductor market. It also makes it one of the simplest ways to profit from the market's secular expansion.
NYSE: TSM
Key Data Points
2. The AI boom will drive TSMC's stock even higher
In the third quarter of 2025, TSMC generated 60% of its revenue from its smallest 3nm and 5nm nodes. In terms of platforms, it generated 57% of its revenue from the high-performance computing (HPC) market, which includes Nvidia's powerful data center GPUs.
During its third-quarter earnings report, TSMC raised its full-year revenue guidance from around 30% growth to mid-30% growth. Most of that growth should be fueled by the artificial intelligence (AI), HPC, and data center markets. On the earnings call, CEO C.C. Wei noted the market's demand for AI chips "continues to be very strong" and that its "conviction in the AI megatrend is strengthening." In addition to Nvidia, TSMC also produces chips for other AI-oriented chipmakers like Broadcom, Qualcomm, and AMD. Therefore, the AI boom should drive TSMC's stock even higher over the next few years.
3. The smartphone market is recovering
TSMC generated 30% of its revenue from the smartphone market in the third quarter. Its largest smartphone customer is Apple, which usually accounts for about a quarter of its total revenue. That business suffered a cyclical decline in 2022 and 2023 as the 5G upgrade cycle ended and inflation curbed consumer spending.
But over the past two years, the smartphone market stabilized as more consumers finally upgraded their older phones to higher-end iPhones and Android devices. Its growth in India also offset the stagnation of the saturated Chinese market. That stabilization should complement the faster growth of its AI, HPC, and data center-oriented markets.
4. TSMC's margins are still expanding
For the full year, TSMC expects to post a gross margin of 59%-61% -- up from its gross margins of 56.1% in 2024, 54.4% in 2023, and 59.6% in 2022. Those margins are consistently rising because its near-monopolization of the advanced chipmaking market gives it nearly unlimited pricing power as the semiconductor market expands. TSMC's gross margins might dip again in the semiconductor market's next cyclical downturn, but the current AI boom might postpone that contraction for at least a few more years.
5. TSMC stock still looks reasonably valued
From 2024 to 2027, analysts expect TSMC's revenue and earnings per share to grow at a CAGR of 24% and 27%, respectively. Those are stellar growth rates for a stock that trades at just 19 times next year's earnings. ASML, which is also a linchpin of the semiconductor market but growing at a slower rate, trades at 35 times next year's earnings.
TSMC's valuations might be compressed by the persistent concerns regarding a military conflict between mainland China and Taiwan, where it still manufactures its highest-end chips. However, TSMC has been building higher-end plants in other countries -- including the U.S., Japan, and Germany -- to mitigate that risk. An actual invasion of Taiwan would also likely trigger a worldwide stock market crash instead of just crushing TSMC, so investors who expect that worst-case scenario to happen should probably avoid most stocks.
But if you don't expect that dreaded conflict to break out, then TSMC is still a great stock to buy. It dominates a crucial link of the global semiconductor supply chain, it's growing rapidly, it's profiting from the AI boom, and its stock looks cheap relative to its growth potential.
