We are still in a market led by growth stocks, and the biggest driving force in the stock market remains artificial intelligence (AI). The technology could prove to be the biggest technological shift of our generation, and it still appears to be in its early stages.
While there are many ways to invest in AI, I believe one of the smartest investments someone can make right now is in Taiwan Semiconductor Manufacturing (TSM +0.54%). With the market still near highs -- although seeing some recent volatility -- starting with a smaller amount, like $1,000, and then adding to your position if the stock dips, could be a good way to start a position in the stock.
Let's look at why I think Taiwan Semiconductor (TSMC) is one of the smartest stocks to buy right now.
NYSE: TSM
Key Data Points
A market leader
TSMC is the world's leading semiconductor contract manufacturer. Manufacturing chips is a difficult endeavor. To be successful at it, companies need not only technological expertise but also scale and high utilization rates to run a profitable operation. It's also a capital-intensive business requiring a lot of upfront costs to build a fab (chip manufacturing facility). As such, most companies that design chips today outsource their manufacturing to third parties like TSMC.
When it comes to manufacturing advanced chips, like graphics processing units (GPUs) or those found in smartphones, TSMC is part of an oligopoly of companies that can fabricate these chips, along with Samsung and Intel. However, its two rivals have struggled to produce advanced chips at small node sizes with high yields (few defects) at scale. This is important because chip designers are constantly looking to fit more transistors on a chip (nodes) to increase processing power and improve energy efficiency.
As the only company capable of doing this at scale, TSMC finds itself in an enviable position. It's become not just a chip manufacturer but also an invaluable part of the semiconductor value chain. Nearly every major advanced chip designed now relies on it, and it partners closely with its largest customers on their future roadmaps to increase capacity to meet their future demand.
This gives TSMC great visibility, and it has been rapidly expanding its capacity and building new fabs to help its customers meet soaring demand for AI chips. As a result, the company believes that demand for AI chips will increase at a mid-40% compound annual growth rate (CAGR) over the next few years.
TSMC's strong position as the go-to chip manufacturer has also given the company strong pricing power, which has helped boost its gross margins. Its gross margins have gone from 46.3% in 2019 to 56.1% last year. According to the media, the company is projected to raise prices by between 3% and 10% in 2026, while prices for its latest 2-nanometer (nm) node processing technology are expected to be 50% more than its 3nm technology.
Image source: Getty Images.
An attractively valued stock
The great thing about TSMC is that it wins no matter who takes market share in the AI chip market. If Nvidia remains the market leader, that's great; it makes its GPUs. If Advanced Micro Devices makes some inroads, that's fine too. If Alphabet's tensor processing units (TPUs) or other ASICs (application-specific integrated circuits) start becoming the chip of choice for AI training or inference, no worries; it manufactures them, as well.
As long as the need for computing power continues to grow, TSMC is set to be one of the biggest beneficiaries, regardless of which chip designer leads the charge. Best of all, the stock is still attractively valued, trading at a forward price-to-earnings (P/E) ratio of around 22 times 2026 analyst earnings estimates. Between its growth opportunities, indispensable position in the semiconductor space, and valuation, TSMC is one of the smartest stocks to buy right now.
