Taiwan Semiconductor Manufacturing (TSM -0.96%) is in a unique position among companies in the artificial intelligence (AI) realm.
For most industries, there are viable alternatives to go to if you don't like a current supplier. However, for logic chip manufacturing, TSMC is practically the only game in town. While there are other competitors, nobody has the capacity available to outright switch, placing TSMC in a powerful position.
Its 52-week high is nearly $480, but the stock currently trades for about $430. So, is this a stock worth buying at these levels? Let's see what history has to say.
Image source: The Motley Fool.
TSMC is way above its historical trading range
Because TSMC is fairly close to its all-time high, pricing history tells us nothing. What investors should be looking at instead is valuation history. This is more practical because it lets investors scale historical data to current business size. Over the past decade, TSMC has traded for a 23 times earnings average, but it's now valued at 31 times earnings.
TSM PE Ratio data by YCharts
That may raise a red flag for investors, as companies trading above their average valuation tend to revert to the mean over the long haul. However, TSMC has now posted consecutive years of its fastest growth rate, and TSMC's elevated growth rate periods also align with its high valuation periods.
TSM Revenue (Quarterly YoY Growth) data by YCharts
The best comparison of this was from late 2020 to 2021, when TSMC's price was also elevated. So, as long as the company can maintain its growth rate, then I think the 30 times earnings price tag is worth paying.
But can the company do it?
CEO C.C. Wei noted in the latest conference call that management forecasts strong chip demand through 2029 to 2030. That leaves several years' worth of strong growth left and once again justifies TSMC's elevated price tag.
NYSE: TSM
Key Data Points
One thing investors are worried about is the cyclical nature of the chip business and what TSMC's business will look like after the AI boom is over. However, Wei also addressed that, saying that the AI industry is new, and there may be a continual amount of money needed to replace aging hardware and continue expanding. This could create a sustainable business, allowing TSMC to capture some of the business gains it has delivered over the past few years.
So, is Taiwan Semiconductor Manufacturing a buy? I'd say yes. The stock is priced at a reasonable level for its growth and has several years' worth of strong growth remaining. As a result, I think it's one of the top AI stocks to buy now.
