There's no question that 2025 has been a rough year for AI stocks thus far.
Pressure from the trade war, high valuations in the sector, and signs that demand may be slowing have all weighed on these fast-growing stocks as nearly all are down year-to-date.
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As of April 25, the Nasdaq Composite was down 11% for the year, and in a bear market, according to some definitions. However, seasoned investors know that these sell-offs present buying opportunities, and one of the most attractive right now is Taiwan Semiconductor Manufacturing (NYSE: TSM), which is trading down 27% from its peak earlier this year.
Image source: Getty Images.
All about TSMC
Taiwan Semiconductor Manufacturing, often known as TSMC, is the world's biggest contract semiconductor, handling more than 50% of contract chip production in the world, and an estimated 90% of contract production for advanced chips.
TSMC is now one of the most valuable companies in the world, and it's the company that tech titans like Apple, Nvidia, Broadcom, Advanced Micro Devices, and Qualcomm, among others, making it a linchpin in the global technology supply chain. Because of its advanced chip-making capabilities, it's also a major player in artificial intelligence (AI).
TSMC today
TSMC has delivered impressive growth through the AI era, and the company benefits from significant competitive advantages in capacity, expertise, technology, and customer relationships.
In its recently released first-quarter earnings report, revenue jumped 41.6% to $25.5 billion even as the company dealt with the fallout from an earthquake in January, and operating income clocked in at $12.4 billion, giving it an operating margin of 48.5%.
Management noted a sequential slowdown in smartphone demand due to seasonality, but said that AI-related demand continued to grow, driven by sales of 3nm and 5nm chips. It also said that tariff policies have not had an impact on customer behavior so far.
Advanced chips, defined as 7nm or less, made up 73% of the company's revenue in the first quarter, showing its strength in advanced technologies. Additionally, 59% of its revenue came from high-performance computing, representing the kind of AI applications that partners like Nvidia turn to TSMC for.
TSMC's growth strategy
Based on the explosion in AI demand and TSMC's impressive revenue growth, it's clear that there's plenty of growth potential for the company, especially as demand for semiconductors should expand over the long term as semiconductors work their way into more products and the tech frontier pushes forward.
Because of the need for semiconductors and concerns about geopolitical tensions around Taiwan, where the company is based, TSMC is building several new plants around the world, including in the U.S., where it's seen as an attractive manufacturing partner.
TSMC was a big winner under the CHIPS Act passed under the Biden administration, and the Trump administration and TSMC recently announced that the company would invest $100 billion in the U.S. in chip manufacturing.
If TSMC can geographically diversify its manufacturing base and adequately grow its capacity, the company's competitive advantages should become even stronger over the coming years.
Why TSMC is a no-brainer buy
TSMC is a dominant tech company with a long runway of growth ahead of it and sustainable competitive advantages.
However, the stock also trades at a surprisingly low valuation for a company of its stature at a price-to-earnings ratio of just 21, meaning it trades at a discount to the S&P 500.
That seems to reflect investor nervousness around geopolitical tensions in Taiwan, but it's in the interest of both the U.S. and China to avoid a military conflict around the island, and even during the trade war, there's been no hint of potential military aggression.
Additionally, the semiconductor sector is cyclical, and it would be sensitive to a lasting trade war or a global recession. However, those risks seem to be more than priced in at the current valuation.
Over the long term, given its growth potential, competitive advantages, and low valuation, TSMC looks like an easy winner.
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Jeremy Bowman has positions in Advanced Micro Devices, Broadcom, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Nvidia, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
