Key Takeaways
- Taiwan Semiconductor Manufacturing (TSMC) has expanded its market share in recent years due to its advanced technology
- The company’s long-term pricing plans demonstrate a long runway of growth ahead and a sustained competitive advantage
- TSMC trades at a more attractive value than Nvidia or Broadcom, with a forward P/E ratio of 24.5
- Analysts expect TSMC’s revenue to increase by 23% this year, resulting in a 26% rise in earnings per share
- The company’s planned price hikes and ramp-up of its 2nm node are expected to support strong revenue growth with healthy margins
Introduction to TSMC
The recent advancements in artificial intelligence (AI) have been made possible by the efforts of a handful of semiconductor companies. Nvidia and Broadcom have been at the forefront of this growth, with their stocks climbing rapidly in recent years. However, another semiconductor stock, Taiwan Semiconductor Manufacturing (TSMC), appears to be an even better buy heading into 2026. As Nvidia CEO Jensen Huang said, TSMC is "the world’s best by an incredible margin" at an investor conference in 2024. TSMC has steadily taken market share over the last few years, with 72% of all spending on contract manufacturing going to the Taiwanese giant last quarter.
TSMC’s Strength and Pricing Power
TSMC’s strength in the market is evident in its ability to implement price hikes for its advanced nodes, including 7-nanometer, 5nm, and 3nm chips. The company has announced a multiyear plan to continue ramping up pricing through 2029, indicating tight long-term supply constraints for those nodes. As the company’s management noted, "we will continue to ramp up pricing through 2029," which demonstrates its confidence in its technology lead and demand for its most advanced nodes. This pricing power is expected to support strong revenue growth with healthy margins, making TSMC an attractive investment opportunity.
Growth Prospects and Competitive Advantage
TSMC’s growth prospects are promising, with analysts expecting revenue to increase by 23% this year, resulting in a 26% rise in earnings per share. However, with the planned price hikes and ramp-up of its 2nm node, those estimates appear low. The company’s ability to produce significantly faster revenue growth over the next few years, along with even better earnings growth, thanks to margin expansion resulting from higher pricing for newer nodes, makes its current forward P/E ratio of 24.5 look like an incredible bargain. As Adam Levy notes, "TSMC should be able to produce significantly faster revenue growth over the next few years, along with even better earnings growth, thanks to margin expansion resulting from higher pricing for newer nodes."
Comparison to Nvidia and Broadcom
TSMC’s valuation is more attractive than that of Nvidia and Broadcom, with a forward P/E ratio of 24.5 compared to Nvidia’s 39.4 and Broadcom’s 34 times earnings. While analysts’ revenue and earnings growth expectations are higher for both companies, there doesn’t appear to be as much upside to those estimates as for TSMC. Additionally, Nvidia and Broadcom have higher levels of customer concentration, which could make their financial results less predictable. As Levy notes, "TSMC looks poised to outperform both Nvidia and Broadcom in 2026."
Investment Opportunity
Before investing in TSMC, it’s essential to consider the company’s prospects and the overall market conditions. The Motley Fool Stock Advisor analyst team has identified what they believe are the 10 best stocks for investors to buy now, and TSMC was not one of them. However, with its strong growth prospects, attractive valuation, and competitive advantage, TSMC appears to be an excellent investment opportunity for those looking to capitalize on the growing demand for advanced semiconductor technology. As the company continues to ramp up its 2nm node and implement price hikes, it’s likely to support strong revenue growth with healthy margins, making it an attractive investment opportunity for the long term.
https://www.nasdaq.com/articles/undervalued-artificial-intelligence-ai-semiconductor-stock-looks-better-buy-nvidia-or