All the advances in artificial intelligence (AI) over the last few years wouldn't be possible without the efforts of a handful of semiconductor companies.
Nvidia (NVDA 1.24%) has been the poster child of AI stocks thanks to its market-leading position in GPUs, which provide the backbone of computing power needed for large language model training and inference. Meanwhile, Broadcom (AVGO 1.15%) has emerged as a key supplier to many of the largest tech companies, providing essential networking chips as well as custom AI accelerators that can perform tasks more efficiently than Nvidia's general-purpose GPUs.
Both companies have seen their sales and profits soar over the last few years as their customers buy up as many chips as they can make. Their stocks have climbed even faster than those financial results, as investors expect them to continue growing for years to come.
However, heading into 2026, another semiconductor stock appears to be an even better buy. It's a company that Nvidia and Broadcom are both closely tied to, but it still appears undervalued by the market.
Image source: Getty Images.
The semiconductor giant that's looking stronger than ever
Nvidia and Broadcom don't print and package their own chips. Instead, they contract with Taiwan Semiconductor Manufacturing (TSM 4.37%), also known as TSMC. There are a handful of companies that offer contract manufacturing, but Nvidia CEO Jensen Huang said TSMC is "the world's best by an incredible margin" at an investor conference in 2024.
TSMC has steadily taken market share over the last few years as demand for the most advanced chip design capabilities has grown significantly faster than the rest of the industry. Indeed, 72% of all spending on contract manufacturing went to the Taiwanese giant last quarter.
The strength of its position hasn't been lost on TSMC's management. It implemented price hikes for its advanced nodes, which include 7-nanometer, 5nm, and 3nm chips, at the start of the year. Customers will pay between 3% and 10% more, depending on contracted volume. Those advanced chips made up nearly three-quarters of TSMC's revenue in the third quarter.
But what was most interesting about the price hike is that TSMC said it will continue to ramp up pricing through 2029. This multiyear plan indicates that it's facing tight long-term supply constraints for those nodes, even as it builds out more capacity, including brand-new facilities in Arizona. Much of that capacity will be dedicated to its 2nm and 1.6nm nodes, though.
With the supply constraints on 3nm, TSMC won't take any new 3nm chip designs, forcing customers to its 2nm node instead. It's seen better-than-expected yields on its early 2nm wafers, and it's ramping up commercial production this year. Moreover, it's charging a significant premium for 2nm chips compared to 3nm. Combined with the customer push, that should support strong revenue growth with healthy margins.
The high yields on its 2nm node have also accelerated the timeline for TSMC to roll out future nodes. That's key as it aims to stay ahead of the competition in order to ensure it remains the contract manufacturer of choice for the biggest chipmakers in the world, like Nvidia and Broadcom. As of right now, it appears to have clear visibility into maintaining its technology lead through the end of the decade.
All this is to say that TSMC should continue to grow its share of contract semiconductor manufacturing spend over the next few years. Not only that, but it should grow increasingly profitable with planned price hikes for older technology and quick ramp-ups of its newest technology. That's a surefire path to very strong earnings growth.
NYSE: TSM
Key Data Points
The stock looks cheap compared to its growth potential
Analysts expect TSMC's revenue to increase by 23% this year, resulting in a 26% rise in earnings per share. But with the price hikes going in place and the ramp-up of its 2nm node, those estimates appear low. That's especially so when you consider the management's signal that it's seeing strong, continued demand for its most advanced nodes, giving it the confidence to announce multiyear price hikes.
TSMC should be able to produce significantly faster revenue growth over the next few years, along with even better earnings growth, thanks to margin expansion resulting from higher pricing for newer nodes. That makes its current forward P/E ratio of 24.5 (based on current estimates) look like an incredible bargain. It's even more attractive when compared to Nvidia's 39.4 earnings multiple and the 34 times earnings investors will pay for Broadcom.
While analysts' revenue and earnings growth expectations are higher for both companies, there doesn't appear to be as much upside to those estimates as for TSMC. What's more, they both have higher levels of customer concentration that could make their financial results less predictable.
As such, TSMC looks poised to outperform both Nvidia and Broadcom in 2026.
