Taiwan Semiconductor Just Proved Why It's a Top AI Investment

Anyone who has invested in the artificial intelligence (AI) space for a while knows how good of an AI investment Taiwan Semiconductor Manufacturing (NYSE: TSM) is. However, TSMC just proved it once again with another blowout quarter, driven by impressive AI demand.

Still, the stock declined during the day after earnings were reported, so the market clearly wasn't impressed. But I think this has more to do with the generic market outlook rather than the quality of TSMC's results, as it proved once again how strong a business it is and gave a rosy outlook.

I think this makes TSMC one of the top AI stocks to buy now, and if you don't own any shares, now is a perfect time to buy.

Image source: Getty Images.

Taiwan Semiconductor just raised future expectations

Taiwan Semiconductor is a giant in the chip world. When you hear about companies like Nvidia (NASDAQ: NVDA) or Apple (NASDAQ: AAPL) having their own chips, that's partially true; they do. However, those two only design the chips; the actual fabrication work is outsourced to companies like Taiwan Semiconductor.

Taiwan Semiconductor is by far the largest chip foundry in the world, and handles nearly all of the volume Nvidia, Apple, and many others have. This gives Taiwan Semiconductor exposure to nearly all parts of the tech economy, which is clearly booming right now thanks to the massive ongoing AI buildout.

The biggest growth catalyst TSMC is feeling is from the AI segment, and a while back gave guidance that AI-related chip revenue would grow at a 50% compound annual growth rate (CAGR) from 2024 to 2029. An analyst on the TSMC Q3 earnings call asked for updated guidance regarding this outlook, and CEO C.C. Wei had this to say:

All I can say right now is the demand is very extremely robust, OK? And we did not see any sign of slowdown whether it's high 50% CAGR, it doesn't matter, it probably will be higher.

Clearly, there's robust demand that's rapidly expanding, and Wei noted that guidance may have been an under-projection, which is great news for shareholders. All of this adds up to TSMC's great Q3 results, which resulted in 51% revenue growth in New Taiwan Dollars, but due to currency exchange rates, a 41% growth in US dollars. Profits grew at a faster rate, rising 69% year over year.

Those are impressive results for any company, and with the AI buildout showing no signs of slowing down, TSMC just showcased once again that it's an incredible business. But is its stock a great buy now?

TSMC's stock is primed to move higher

As we inch closer to 2027, I think valuing stocks based on 2027 estimates is starting to be a good idea. From this standpoint, TSMC now trades for 18 times next year's earnings.

TSM PE Ratio (Forward 1y) data by YCharts

Currently, the stock trades for 27 times trailing earnings. So, if TSMC hits all analyst expectations during 2027 and its valuation stays at 27 times earnings, that implies that TSMC's stock will rise 50% next year. Now, whether that occurs or not is a different question, but that is what the math is indicating.

As long as the AI buildout outlook looks strong into 2028 and 2029 (which TSMC confirmed in its conference call), I think the outlook for TSMC's stock continues to look very bright. We're still in the early innings of the AI buildout, and TSMC is one of the best ways to invest in the AI arms race as a whole. Its dominance in the chip fabrication industry cannot be denied, and as long as the AI buildout is ongoing, TSMC will continue to report impressive results, making it a great buy now.

Keithen Drury has positions in Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Apple, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.