Semiconductor stocks have been the biggest driving force behind the stock market’s returns over the last year or so. The sector climbed an astonishing 158% from September until its peak last month. By comparison, the S&P 500 climbed 15.7% during that same period.
But investors have soured on chip stocks recently. The PHLX Semiconductor Sector index is down more than 22% from its peak in just over a month, driven by growing concerns about the sustainability of hyperscalers’ massive AI spending. Some of the market’s highest flyers have been among the hardest hit in the sell-off, creating buying opportunities for those who still expect strong revenue growth tied to AI expenditures.
Missed Nvidia in 2009? This Rare Signal Is Flashing Again. In 2009, a “Double Down” signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same “Total Conviction” signal is flashing for a company 1/100th the size of Nvidia. Continue »
Here’s the one chip stock I’m buying right now.
Image source: Getty Images.
This chip giant has an incredible moat
One of the biggest companies influencing the semiconductor industry is Taiwan Semiconductor Manufacturing (NYSE: TSM), also known as TSMC. The company is the world’s largest contract chip fabricator, accounting for 73% of the market, according to Counterpoint Research. That market share has increased in recent years as demand for leading-edge chips like those found in AI data centers has ballooned.
TSMC holds a considerable technological lead over competing foundries, including Samsung and Intel. Samsung has faced yield challenges and delays that have prevented it from competing for the most advanced chip designs while eroding customer trust. It’s seeing progress with its 2nm process, but it still remains well behind TSMC. Intel, meanwhile, is focused on developing its 1.4nm process, which is set to compete with TSMC’s similar process starting in 2028.
While competitors might challenge TSMC’s technology, the greater challenge for competitors will be TSMC’s scale. The company is absolutely massive, and it’s spending huge amounts to build out additional capacity every year. In fact, the company recently increased its capital expenditure guidance by $8 billion at the midpoint for the full-year 2026. That’ll have the company spend a total of $62 billion, and management said it expects that number to climb significantly in the coming years. That’s a level of manufacturing capacity Samsung and Intel can’t touch.
TSMC’s scale also allows it to amortize its research and development expense across a broader customer base. That ensures it can maintain its technology lead as it can afford to spend more on advancing its manufacturing capabilities. It also has the advantage of working closely with leading chip designers to determine exactly what they need to improve performance and power efficiency in the next generation of chips.
All this gives TSMC the confidence to invest more in expanding its manufacturing capacity and to raise its prices. It raised prices for its most advanced manufacturing processes at the start of the year and plans to raise prices annually going forward. It’s also reportedly planning a price increase for legacy processes next year.
Unlike memory chipmakers, who allow their prices to fluctuate with demand, TSMC wants to avoid price spikes. CEO C.C. Wei emphasized that he doesn’t want to squeeze customers out of the market. “We earn our value and we make sure that our profit, our gross margin, is enough for our long-term sustaining expansion,” he said. In other words, he believes the increased pricing is sustainable for TSMC and its customers, supported by its leading technology.
There’s a lot of growth left in the company
TSMC raised its full-year revenue outlook to slightly above 40% alongside its second-quarter earnings report. That’s up from previous expectations of 30%. Additionally, Wei indicated that its previous long-term guidance for revenue to grow at a five-year compound annual growth rate of 25% through 2029 is too low. “We don’t give you the number today because it continues to increase,” he responded to a question about updated long-term guidance.
If revenue growth averages just 25% through 2029, that implies 17% annualized revenue growth in 2027 through 2029. A 30% compound rate would push that number closer to 25%.
While there are some gross margin headwinds that could impact TSMC, including the ramp-up of its 2nm process and increased production in the United States, it should be able to offset those headwinds with planned price hikes. The result should be a robust gross margin and earnings growth that roughly matches its revenue growth.
But the market wants just 28 times forward earnings expectations for the stock. That’s a great value for a wonderful company with very strong competitive advantages. That makes it my No. 1 semiconductor stock pick in the current sell-off.
Should you buy stock in Taiwan Semiconductor Manufacturing right now?
Before you buy stock in Taiwan Semiconductor Manufacturing, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Taiwan Semiconductor Manufacturing wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Netflix made this list on December 17, 2004… if you invested $1,000 at the time of our recommendation, you’d have $386,727!* Or when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $1,232,139!*
Now, it’s worth noting Stock Advisor’s total average return is 906% — a market-crushing outperformance compared to 208% for the S&P 500. Don’t miss the latest top 10 list, available with Stock Advisor, and join an investing community built by individual investors for individual investors.
Adam Levy has positions in Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Intel and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
