Taiwan Semiconductor is a key partner for many of the biggest tech companies.
Taiwan Semiconductor (TSM 1.08%) may be one of the best investments in the tech space right now. While it has been a long-term outperformer, we’re just at the beginning stages of some of the largest tailwinds it has experienced in years. But how much can investors expect from this chip manufacturer?
Taiwan Semi has some big tailwinds approaching
Taiwan Semiconductor is in a unique position among tech companies. Because it is a contract manufacturer of chips, it works as a fabrication partner for many companies that compete. For example, it makes chips for both Nvidia and Advanced Micro Devices. Although Nvidia is currently dominating the data center GPU market, which is booming due to high artificial intelligence (AI) demand, AMD could retake some of that market share in the future. Regardless, TSMC will benefit from the overall market boom.
As a neutral investment, Taiwan Semi isn’t going to have nearly the highs and lows of a company competing on the open market. But as long as technology becomes more prevalent, TSMC will be a successful business. That’s a pretty easy and obvious investment trend to cash in on, making Taiwan Semi one of the most brilliant stocks to invest in.
The company also has some significant tailwinds approaching.
First, TSMC’s largest customer is Apple, which makes up around a quarter of its sales in any given year — and that’s been a problem recently because iPhones haven’t sold nearly as well as they previously have. However, now that Apple has announced its take on AI — Apple Intelligence, which will only be available on the latest generation of phones — TSMC may see its smartphone business pick up.
Second, TSMC believes that AI-related chips are going to be a massive hit. Management projects a compound annual growth rate of 50% through 2027. By then, AI-related chips are slated to make up more than 20% of TSMC’s overall sales, which is huge growth for a new segment.
Lastly, Taiwan Semi is launching a new chip design starting in 2025. The 2 nanometer (nm) chip is TSMC’s next-generation technology, following the 3nm chip it launched last year. How much performance gain can be achieved by reducing the chip node by 1nm? Quite a lot, actually. Management claims that its 2nm chip design can be configured to deliver a 10% to 15% speed improvement over the old generation at the same power consumption rate.
But that’s not why customers will buy it. The biggest improvement will come from energy efficiency. When configured at the same speed as a 3nm chip, the 2nm chip will consume an impressive 25% to 30% less power. That’s a massive improvement and something that should be in high demand, especially considering the energy operating costs that some of these massive AI services consume. Management is already seeing higher demand for this new technology than its previous launches, the 3nm and 5nm architecture.
With so many big events on the horizon for TSMC, it’s no wonder why it is among the best tech stocks to invest in right now.
The stock isn’t much more expensive than the S&P 500
Even the best companies can turn out to be disastrous investments if bought at the wrong price. Fortunately, TSMC can be scooped up for a fairly reasonable price tag.
TSM PE Ratio (Forward) data by YCharts
At 25 times forward earnings, TSMC barely holds a premium to the broader S&P 500 index, which trades at 23 times forward earnings. With TSMC’s market positioning and massive headwinds, I’m fairly confident that it is a much better investment than the average S&P 500 business.
As a result, I think Taiwan Semiconductor could be one of the best investments in tech right now, as it provides a balanced approach to taking advantage of the various AI tailwinds.
Keithen Drury has positions in Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
