TSMC Is Critical for AI, and Its Shares Are on Sale
The chip manufacturer is growing fast despite headwinds, yet its valuation has fallen, creating a buying opportunity
The Takeaway
• TSMC’s sales are strong but its shares are down
• The company’s valuation has fallen well below its five-year average
• TSMC shouldn’t be hurt badly by tariffs as it doesn’t have much competition in AI chips
Artificial intelligence depends on Nvidia’s computer chips. Nvidia depends on Taiwan Semiconductor Manufacturing Co. to make those chips. Right now, TSMC is in many ways the better way to invest in AI for the long term.
TSMC and Nvidia are closely linked in business and in the stock market. Both companies’ stocks have soared on the back of the AI boom and both are down this year, partly as a result of President Donald Trump’s tariff threats.
The market turned around this week after Trump declared a cease fire in the trade war. The two chip stocks bounced back too, with TSMC rising almost 9%, but they are both still down for the year. As a result, even after the market broadly recovered this week, the two semiconductor companies are still down more than the S&P 500 index in 2025.
The connection between the stocks means that investors are missing some of TSMC’s positives. Valuations, tariffs and competition all tip in its favor right now.
“If you believe that AI is really going to transform big parts of the world, every AI chip out there needs to be manufactured by someone, and the only manufacturer leading AI chips today is TSMC,” said Sean Sun, portfolio manager at Thornburg Investment Management.
Tariffs, at whatever level they end up, will likely have only a modest impact on TSMC, given that its chips are indispensable for AI data centers. Its executives told investors on its earnings call on April 17 that they hadn’t seen any signs of falling demand from its main AI customers, and they reaffirmed their previous projection that the company would double its revenue from making AI chips in 2025.
It’s also promising that over the last few weeks, the tech giants fueling the AI boom, including Microsoft, Alphabet and Meta Platforms, reassured investors they didn’t plan to slow their AI spending this year.
TSMC’s sales in April grew 48% to over $11 billion, the company said. It also reaffirmed that it expects to grow sales by close to 20% in each of the next five years, including 2025.
A key selling point for TSMC now is its valuation. TSMC is currently trading at a forward price-to-earnings ratio of 15.7 times, well below its average multiple of 19 times over the last five years. “I don’t think [TSMC stock is] expensive at all just because of the growth trajectory they’re facing in the next five years,” said Rihard Jarc, who runs a small firm called New Era Funds and writes a tech blog.
Nvidia trades at a forward price-to-earnings ratio of nearly 30 times, while the S&P 500 Index is around 21 times forward earnings. Nvidia’s valuation premium makes sense because it has better margins than TSMC.
TSMC has several advantages over Nvidia. The company can handle the complex manufacturing tasks required by Nvidia’s competitors such as Google and Amazon, which are designing their own chips for some AI workloads, said Jarc. These chips represent potential competition for Nvidia.
“The reason why I don’t have Nvidia and I do have TSMC in my portfolio is because I see them as a winner in every case,” said Jarc.
To be sure, TSMC faces real risks. For one thing, it tends to rise and fall with the broader semiconductor industry, which can be volatile partly because its capital-intensive nature makes it difficult for companies to respond quickly to shifts in demand.
“Semiconductor stocks are cyclical, and they’re not necessarily defensive in a broader global recession or anything like that, so I think that’s why it’s probably trading a little bit of a discount. But as a long-term investor, we’re thinking about it through cycles,” Thornburg’s Sun said.
As the first company to go full speed ahead solely as a chip manufacturer, TSMC has built a huge technological advantage in creating the most cutting-edge silicon. The company captured 67% of global chip manufacturing revenues in the last quarter of 2024, an increase from the sub-60% share it had for most of 2023, according to the latest data from Counterpoint Research.
“If you go back many, many decades ago, there were lots and lots of competitors. But as the nodes have gotten smaller and smaller, you’ve seen it become a smaller number of players over time,” Sun said. “Once you fall off that technology curve, you don’t get back on.”
Perhaps the biggest but most uncertain risk for TSMC would be a Chinese move to reclaim Taiwan as its own territory, through either a blockade or a direct attack. Indeed, Sun said, such a move is a “black swan event” that would be disastrous for the global economy. But, he added, “some of that is reflected in TSMC’s multiple already, probably more so than it deserves,” leading TSMC’s shares to be “unfairly discounted relative to the actual risk.”
TSMC is trying to get ahead of the twin threats of Chinese actions and U.S. tariffs by moving to diversify its operations geographically and reduce its dependence on Taiwan. Earlier this year it pledged to spend an additional $100 billion over the next four years on manufacturing plants in the U.S.
It plans to use that money to build out a total of six new manufacturing plants in Arizona, where executives say they expect to manufacture nearly one-third of their most advanced chips. TSMC also started building its first plant in Europe last year and started mass production at another overseas facility in Japan.
While making chips in countries where labor is more expensive than in Taiwan will cut the company’s gross margin by a few percentage points, according to its executives, investors are confident that TSMC can ease the impact by hiking its prices—something its customers seem likely to accept.