Taiwan Semiconductor Manufacturing (NYSE: TSM) is currently one of my top stock picks. Although there are concerns about Taiwan's geographical location, the company is taking steps to ease them. While it's doing that, there's a massive demand for chips, and TSMC is rolling out new technology later this year and next to meet that need.
If you weren't aware already, TSMC makes the actual chips for most all the biggest semiconductor companies. Because of that neutral stance in the chip world, I think it's one of the best ways to play nearly every technological trend. When you trace almost every technology back to its chip roots, many roads lead to TSMC, which is why I'm so bullish.
I've got four reasons investors should buy Taiwan Semiconductor's stock like there's no tomorrow, although there are likely many more out there.
Image source: Taiwan Semiconductor.
1. Taiwan Semi's footprint is going global
Two risks are typically discussed when discussing TSMC's stock: tariffs and China. There's a fear that China could take over Taiwan, but this move would send markets around the world into disarray. Tariffs are another concern, but currently there aren't any on semiconductors.
While these two fears may not be an issue now, that doesn't mean they won't be in the future. To get ahead of that, Taiwan Semiconductor is diversifying its global footprint. It already has a $65 billion facility in the U.S., but it's deploying an additional $100 billion to build even more production capacity. TSMC is also building facilities in Germany and Japan, which helps decrease the risk of generating nearly all of its revenue from Taiwan.
By increasing U.S. production, it's also decreasing its chances of being affected by tariffs. The demand for U.S.-produced chips is already high, and the Arizona facility has already sold out production capacity through 2027. Taiwan Semiconductor is making smart moves by investing in areas outside of Taiwan. This reduces a ton of risk with the stock.
2. New technology is coming
Although TSMC already has industry-leading 3 nanometer chips available, it's slated to launch 2nm and 1.6nm chips in late 2025 and 2026, respectively. While these chips can be configured to have greater speed, power consumption is the real innovation with these two technologies.
When configured at the same speed level as 3nm chips, 2nm chips will see a 20% to 30% improvement in power consumption, and 1.6 nm chips will see a 15% to 20% improvement on top of that.
Power consumption is a massive cost for operating data centers, and any technology that can improve this will be incredibly popular. This could be a huge growth driver for TSMC, as companies may find upgrading to computing units with 2nm or 1.6nm chips more cost-effective than running power-hungry older generations.
3. Management sees massive growth ahead
Many tailwinds are blowing in TSMC's favor. The combination of new technology and an increasingly intense AI arms race has caused demand for TSMC's chips to boom. Management has discussed this at length during its conference calls, leading it to give investors guidance that AI-related chip revenue will grow around a 45% compound annual growth rate (CAGR) over the next five years. Companywide, it expects its revenue CAGR to approach 20%.
That's monster growth over five years, and if management slightly exceeds expectations and delivers a 20% revenue CAGR, its revenue will increase by nearly 150%. Few companies can deliver that kind of growth, and if TSMC delivers on those projections, it will be a must-own stock.
4. TSMC's projected growth isn't priced into the stock
Typically, when a stock is projected to grow at a market-beating rate over a considerable time period, it trades at a premium to the broader stock market. However, that's not the case with Taiwan Semiconductor's stock.
At just shy of 21 times forward earnings, TSMC's stock is cheaper than the S&P 500, which trades for around 22 times forward earnings. This means that Taiwan Semi's stock isn't priced at a premium, and investors can have confidence that they're not overpaying. Taiwan Semiconductor has multiple strong reasons to buy the stock now. With the stock priced at the market average, it looks like one investors can buy like there's no tomorrow.
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Keithen Drury has positions in Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
