In January 2025, I predicted that Taiwan Semiconductor Manufacturing (TSM +2.21%) would rocket higher throughout the year. That prediction ended up being dead-on, as the stock soared nearly 54% higher throughout 2025. That's an impressive one-year return for the computer chip manufacturer and it would cause some investors to hesitate on the stock, thinking it has already had its run. But I'm not ready to give up on TSMC's stock yet.
Almost everything that I discussed in that article in early 2025 is still relevant today, and even if you missed out on 2025's run, I think that TSMC is well-positioned to deliver similar results in 2026.
Image source: Getty Images.
AI spending is still occurring at a high level
The main case in my 2025 prediction is that TSMC is in a critical spot for the artificial intelligence buildout. While companies like Nvidia or Advanced Micro Devices may grab most of the headlines, the reality is that these companies are fabless chip companies. That means they design the chip, but they have no part in the manufacturing process.
One of the key members of this process is TSMC, which actually makes the chips. TSMC is so dominant in this space that there is relatively little competition, and it has captured the majority of the market share in the production of cutting-edge chips.
NYSE: TSM
Key Data Points
So, when you hear about Nvidia or AMD doing well, or a new data center going up, you can pretty much assume TSMC is also doing well. That's exactly what happened in 2025, and is expected to happen in 2026.
In the fourth quarter, TSMC's revenue rose 26% year over year in U.S. dollars -- a strong sign that its clients are still buying as many chips as they can get their hands on. For 2026, they expect about 30% revenue growth. But 2026 isn't the end for this massive chip demand.
Management believes that revenue from AI chips will increase at a mid- to high-50% compound annual growth rate (CAGR) for the five-year period between 2024 and 2029. That's monstrous growth, and shows that we're far from done building out AI computing power. This trend is still front and center in the broader market, and as long as AI hyperscalers continue to ramp up their spending, TSMC will be a great investment option.
However, there's another part of this story: Valuation.
TSMC trades at nearly the same level as it did in 2025
At the start of 2025, I pointed out that TSMC's valuation was cheap, trading at 23 times forward earnings. I still believe that's the case, and now it trades for 24 times forward earnings.
Data by YCharts. PE = price-to-earnings.
As a result, I think TSMC is still an excellent buy in 2026, and those who missed out on 2025's strong run can confidently buy shares now.
