TSM Stock: Is This the True Winner of the AI Race?
During the great AI rally of 2024, we’ve seen a lot of stocks come out as winners. Leading the pack has been NVIDIA ($878.4|0.12%) which has established itself as far and away the leader of the industry. Not only is NVIDIA manufacturing the strongest AI GPUs, it just announced the most powerful AI GPU to date known as Blackwell.
Then there are secondary winners like AMD (NASDAQ: AMD) and Micron Technologies (NASDAQ: MU). These are chip stocks that have seen a massive increase in demand for their products, whether they are chips or data center-related infrastructure or hardware. We’ve also seen SMCI (NASDAQ: SMCI) hit the mainstream and even Dell Technologies (NYSE: DELL) re-emerge as a partner to NVIDIA.
But there is one stock that never really receives the credit it deserves when it comes to AI and chips. That company is Taiwan Semiconductor Manufacturing Company ($138.5|0.15%). Without TSM, none of these chips would even exist. I find that TSM is a known company by most investors but perhaps it is misunderstood. While I recognize why the market is so bullish on stocks like NVIDIA, here’s why I think TSM could be the most important company in the world.
TSM is the Foundation for the AI Industry
TSM is a global chip foundry that makes the powerful GPUs that allow AI computing to exist. While companies like NVIDIA and AMD are known as chip makers, they actually just design the chip and have TSM make it for them. That’s right, most chip companies don’t even make their own chips. This is one part of the industry that I believe is very misunderstood by most investors.
So how important is TSM? Well, it operates as almost a monopoly in the global foundry sector. Other foundries include Samsung and Intel (NASDAQ: INTC) to an extent, but neither have the market share that TSM has. TSM makes CPUs and GPUs for companies like NVIDIA, AMD, Apple, Broadcom, Arm, Marvell, and Qualcomm, just to name a few. There’s a good chance the device that you are reading this article on has a TSM chip in it.
TSM’s stock has gained nearly 40% this year which is about half of NVIDIA has returned. I understand that there are differences in the margins of making chips versus selling them in devices. But TSM’s stock is trading at just 10x sales and 22x forward earnings. That’s pretty cheap for a stock in a sector that is slated to grow exponentially in the coming years.
The company has built new factories outside of Taiwan in Japan and Southeast Asia and is looking to establish a home in America as well. This brings us to the one headwind that TSM faces: a potential Chinese invasion. I suspect this is why the stock trades at somewhat of a discount. But with TSM spreading its production internationally now, this is becoming less of an issue.
TSM’s price multiples are dirt cheap and it even pays a 2.05% dividend yield right now. Tell me why in five years, TSM won’t be a huge winner and perhaps the most valuable chip company in the world.
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