This AI Stock Is Quietly Gaining Ground. Should You Buy Now?

Key Points

• With AI infrastructure continuing to ramp up, TSMC is well situated to continue to see big growth ahead.

• The company should also benefit from advancements in other technologies, including robotaxis and robotics.

• Meanwhile, the stock remains inexpensive.

• 10 stocks we like better than Taiwan Semiconductor Manufacturing ›

Taiwan Semiconductor Manufacturing (NYSE: TSM) is not the stock that gets the big headlines when people talk about artificial intelligence (AI). It doesn't design the chips that are powering the AI infrastructure build-out, like Nvidia (NASDAQ: NVDA) with its graphics processing units (GPUs). But without TSMC's expertise, the AI boom likely would not be possible.

What TSMC does do is take all those chip designs and manufacture them at scale. This is something other chip manufacturers do, but not nearly as well or as efficiently, making TSMC one of the most important companies in the entire semiconductor supply chain. That role also gives it a unique advantage because it doesn't have to bet on who wins in chip design. Whichever designer comes out ahead will still need TSMC to make their chips.

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That's why Nvidia's CEO Jensen Huang has gone out of his way to praise the company. He called TSMC "one of the greatest companies in the history of humanity." He even added that "anybody who wants to buy TSMC stock is a very smart person." That's high praise from the CEO of the largest company in the world.

Image source: Getty Images.

The foundry leader

TSMC has become the dominant foundry in the world, by far. Intel has been trying to build a competitive foundry business for years, but it's still losing money and has struggled with production yields. Samsung has also struggled with yields. This is why Alphabet recently moved its Tensor G5 smartphone chip production over to TSMC. Neither competitor is a competitive threat at this point.

TSMC, meanwhile, is the only foundry that has shown it can reliably shrink node sizes and deliver strong yields at scale. Smaller nodes mean more transistors can fit on a chip, making them faster and more efficient. Advanced chips use small nodes, and these chips are where TSMC shines. Chips built on 7nm or smaller nodes make up nearly three-quarters of its revenue, with 3nm alone now about a quarter. The company is already preparing to move into 2nm, which shows how far ahead it is.

With rivals struggling to keep up, every major AI chip designer has no choice but to rely on TSM. That puts it in an enviable position, because it doesn't have to chase customers; customers come to it hoping to grab some capacity.

Pricing power

TSMC's position in the market has also given it strong pricing power. The company has consistently been able to raise prices for its services, and according to reports, it will increase prices next year by 10%. That will be a nice revenue growth driver, but honestly, it could likely have raised its prices even more. However, the company does view itself as a partner with its customers.

This has also helped TSMC boost its gross margins over the years. Last year, its gross margin came in at a solid 56.1%, which was a big jump from the 46.4% it posted in 2019. While there will be margin fluctuations as it builds new fabs (manufacturing facilities) outside of Taiwan and introduces new nodes, this is just a better business overall than it was before the pandemic.

Big opportunities ahead

AI chips are going to be the main growth driver for TSMC for years to come. Nvidia has predicted the market for AI infrastructure will rise to between $3 trillion to $4 trillion in the next five years. TSMC management, meanwhile, has forecast that AI chip demand will grow at a more than 40% compounded annual growth rate (CAGR) through 2028. Those are just some mind-blowing numbers.

However, AI chips are not TSMC's only big opportunity on the horizon. Autonomous driving is another area that could require an enormous amount of computing power. If robotaxis are really going to fill city streets in the next decade, each of them will need multiple advanced chips to operate safely. That's another market where TSMC is positioned right in the middle to benefit.

Beyond AI and autonomous vehicles, the company is also set to benefit from anything that needs advanced chips. This could be robotics, such as Tesla's Optimus, or quantum computing. Wherever technology is headed, though, there likely is going to be a need for powerful chips behind it. And of course, that benefits TSMC.

A quiet winner

As a huge AI beneficiary, TSMC has been a quiet winner. It is growing quickly, with revenue soaring 44% year over year last quarter, but it still only trades at a forward price-to-earnings (P/E) ratio of just 21 times 2026 analyst estimates.

Huang is probably right. Anybody buying TSMC today may look back a few years from now and be very glad they did.

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Geoffrey Seiler has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Intel, Nvidia, Taiwan Semiconductor Manufacturing, and Tesla. The Motley Fool recommends the following options: short August 2025 $24 calls on Intel and short November 2025 $21 puts on Intel. The Motley Fool has a disclosure policy.