The current stock market bull run, while great for investors, has made it difficult to distinguish which companies have the potential to be long-term winners and which are merely benefiting from the current market optimism.
And it's especially difficult to assess artificial intelligence (AI) stocks right now, since so many are flying high and nothing seems to be bringing them back down to earth. But that doesn't mean all of them are just flash-in-the-pan stocks, of course. One company that is experiencing a share price surge and has significant potential to continue growing in the coming years is Taiwan Semiconductor Manufacturing (TSM 3.03%), also known as TSMC.
Here's why I'd put money into this stock if I could only pick one right now.
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1. TSMC's sales and earnings are growing at a healthy clip
TSMC recently reported strong fourth-quarter results, with sales rising nearly 26% to $33.7 billion and earnings increasing 35% to $3.14 per American depositary receipt. Management is guiding for more growth in the first quarter of this year, with an estimated 86% increase in sales in the first quarter -- to just over $35 billion at the midpoint of guidance -- and for revenue to increase by 30% in 2026.
What's more, TSMC has a healthy gross margin of just over 62%, allowing the company's bottom line to increase as its sales rise. This is important to highlight because while some AI companies have rapidly expanding sales -- and share prices -- some of them have failed to generate significant and sustainable profits.
The goal for long-term tech investors isn't to find stocks that are only benefiting from a popular trend, but for the companies to also be profitable (or working toward it) and have sustained advantages over their rivals. More on TSMC's advantages below.
2. Taiwan Semiconductor's processor manufacturing is unmatched
One huge advantage Taiwan Semiconductor has over other AI stocks is that while other companies are vying for a top spot in their respective artificial intelligence markets, TSMC has already established a wide moat around its business.
For example, TSMC manufactures about 70% of the world's semiconductors and makes an estimated 90% of the most advanced chips. That's a nearly insurmountable competitive advantage TSMC has in the processor manufacturing space, and it won't go away anytime soon.
NYSE: TSM
Key Data Points
Only Taiwan Semiconductor and Samsung manufacture 3nm and 5nm processors at scale, and Samsung has a tiny market share compared to TSMC and has also had problems manufacturing 3nm chips with high yields. This means that for the foreseeable future, when large tech companies need advanced AI chips, they'll mostly likely hire TSMC to make them.
With this lead and continued investments in new manufacturing techniques, Morningstar research estimates that TSMC's advantage could last for decades.
Buy and hold TSMC for AI demand and beyond
For the reasons above, I think buying and holding Taiwan Semiconductor would be a very wise move. Spending for AI data center infrastructure will reach an estimated $3 trillion to $4 trillion over the next five years, giving the company many more years to benefit from this surge of AI processor demand.
But even beyond that, tech companies will very likely need advanced processors -- for other technologies like the Internet of Things and self-driving cars -- for decades and that will help sustain processor manufacturing for years. And with its clear lead in processor manufacturing, Taiwan Semiconductor is likely to be the leading manufacturer for years to come, no matter what the next tech wave brings.
