Key Points
-
Semiconductor stocks have dropped over the last month.
-
Foundry leader Taiwan Semiconductor Manufacturing already holds a massive market share in the chip manufacturing industry, and it could grow even larger in the years to come.
-
TSMC trades at a bargain level relative to its potential growth.
-
Investors have soured on AI stocks. The hyperscalers face pressure as they spend hundreds of billions of dollars annually on their AI build-outs, and several have already dipped into negative free-cash-flow territory. The neoclouds face significant financing challenges as their cost of capital continues to climb. And ultimately, that’s all hitting the shares of the semiconductor companies that design and sell the chips that go into the data centers powering the proliferation of AI.
Semiconductor stocks as a class are down by about 30% since Oct. 6 (as measured by the benchmark PHLX Semiconductor Sector index). Few chip stocks have been spared. Nvidia (NASDAQ: NVDA) is down 21%, and Micron (NASDAQ: MU) is down 34%. Smart investors may see this pullback as an opportunity to buy chip stocks at a discount. Indeed, there are a growing number of attractive opportunities in the sector. But I wouldn’t buy Nvidia or Micron stock at the current prices.
Missed AI’s “Act 1”? Act 2 Could Be 15x Bigger. Most investors think they missed the AI boat because they didn’t buy Nvidia in 2005. But according to our analysts, we’re only at the end of “Act 1″—the R&D phase. “Act 2” is the global rollout. Continue »
If I could buy and hold just one AI chip stock right now, it would be Taiwan Semiconductor Manufacturing (NYSE: TSM).
The company behind the most advanced chips in the world
Every company that’s designing advanced chips for artificial intelligence relies heavily on TSMC to manufacture them. The world’s largest third-party foundry has the most advanced chip production processes and the scale to meet the growing demand for advanced chips. As a result, its long-dominant market share has grown to 73% of contract semiconductor manufacturing spend.
TSMC benefits from a virtuous cycle that should ensure it maintains or even expands on that dominance. It generates huge revenues every quarter with a foundry operation that is significantly larger than all of its would-be rivals combined. That provides it with plenty of funds that it can reinvest in research and development to maintain its technological lead. It also provides more capital to invest in expanding its production capacity, enabling it to serve more customers and larger contracts. That, in turn, leads to additional revenue growth, restarting the cycle.
TSMC also benefits from its close working relationships with its largest customers, which help it identify opportunities for performance improvements and plan capital expenditures effectively to avoid overbuilding capacity. While the semiconductor industry is cyclical, TSMC’s irreplaceable role in its customers’ supply chains helps mitigate earnings volatility. By contrast, Micron and its fellow memory-chip makers continue to face valuation challenges due to the commodity-like nature of the chips they both design and manufacture.
To be sure, TSMC is investing significant capital to expand its production capacity. Management has guided for between $60 billion and $64 billion in capex spending this year, up from $40.9 billion in 2025 and $29.8 billion in 2024. Management expects to continue boosting its capex over the next two years.
But that spending should translate into strong revenue growth.
“The majority of the capex is always related to the long-term demand,” CFO Wendell Huang said on the company’s third-quarter earnings call. “We have no intention to leave any food on the table for others.”
In other words, TSMC is using its dominant position today to ensure it remains the dominant force in contract semiconductor manufacturing for years to come, and to keep delivering strong revenue growth. Management’s long-term guidance for 25% compound annualized revenue growth between 2024 and 2029 will need an update after the company grew sales 35.9% in 2025, and that number has accelerated in 2026.
The stock looks like a bargain
After the recent sell-off in semiconductor stocks, TSMC shares now trade around 21 times forward earnings expectations. That’s a similar level to Nvidia, but well above Micron’s 4 multiple.
Micron’s multiple is significantly lower due to the cyclical and commoditized nature of the memory chip industry. Pricing for memory chips has for decades been much more volatile than logic chips: How much Micron charges for its chips is dictated almost entirely by supply and demand conditions.
Despite a tight supply for the logic chips that TSMC manufactures, it hasn’t hiked its prices by an exorbitant amount, and CEO C.C. Wei said TSMC will avoid sudden price hikes. That strategy, combined with its better supply and demand forecasting capabilities due to its position in the market, means TSMC’s earnings are much more stable. Micron, by contrast, is expected to see its earnings start to drop in 2029 as more memory-chip manufacturing capacity comes online across the space and supply starts to catch up with demand.
While Nvidia is growing significantly faster than TSMC with much lower capital intensity, TSMC is the better long-term investment at the current price. It stands to benefit from the growing demand for semiconductors regardless of which companies are designing tomorrow’s most popular data center chips. Its leading position in the industry is unlikely to change anytime soon. In other words, it’s more predictable than Nvidia, which makes it a more attractive long-term opportunity.
With expectations for revenue growth well above 20% and TSMC’s ability to maintain wide operating margins, the stock at its current earnings multiple looks like a bargain.
Should you buy stock in Taiwan Semiconductor Manufacturing right now?
Before you buy stock in Taiwan Semiconductor Manufacturing, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Taiwan Semiconductor Manufacturing wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Netflix made this list on December 17, 2004… if you invested $1,000 at the time of our recommendation, you’d have $341,966!* Or when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $1,146,819!*
Now, it’s worth noting Stock Advisor’s total average return is 852% — a market-crushing outperformance compared to 203% for the S&P 500. Don’t miss the latest top 10 list, available with Stock Advisor, and join an investing community built by individual investors for individual investors.
See the 10 stocks »
*Stock Advisor returns as of November 7, 2026.
Adam Levy has positions in Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Micron Technology, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
