Nvidia and Micron Can't Make AI Chips Without This Growth Stock. Here's Why It Could Soar.

Nvidia (NASDAQ: NVDA) and Micron (NASDAQ: MU) are synonymous with the artificial intelligence (AI) boom.

Both are chip stocks, both have posted enormous returns, and both are reliant on another AI chipmaker, Taiwan Semiconductor Manufacturing (NYSE: TSM).

In many ways, Taiwan Semiconductor, or TSMC, is the gatekeeper of the AI boom, because without it, the breakneck growth of Nvidia, Micron, and other AI-related companies would not be possible.

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Taiwan Semiconductor, the AI gatekeeper

TSMC does pretty much one thing: It makes chips and semiconductor components for other companies, like Nvidia and Micron. That's why it is called a foundry -- a term that refers to a factory where things are manufactured.

As a semiconductor foundry, it is dominant, making about 70% of all chips and roughly 90% of more advanced AI semiconductor chips. Its major customers include Nvidia, as well as other tech stock giants like Apple, Broadcom, Advanced Micro Devices, and Amazon, to name a few.

TSMC makes millions of advanced chips every year and will generate some $33 billion from its largest customer, Nvidia, in 2026.

Nvidia could not produce that many advanced chips that quickly without TSMC. Its technologies and processes set it apart from competitors, and it stands alone in its ability to make the most advanced chips at such scale, speed, and cost. This is why Taiwan Semiconductor is so indispensable to Nvidia.

Micron is part of the TSMC architecture

TSMC does not play the same role for Micron, but it is just as valuable to the memory chipmaker. While TSMC doesn't make memory chips for Micron, it makes the components that are required for Micron's advanced, next-generation high bandwidth memory (HBM) chips, which are used for AI applications.

As with Nvidia, TSMC's advanced technologies and processes are needed for these faster, more advanced HBM chips, and Micron could not make them as quickly or at such a scale without TSMC.

In addition, Micron partners with TSMC to package the next-generation HBM chips using TSMC's CoWoS (chip-on-wafer-on-substrate) technology. Nvidia and other chip companies use TSMC packaging for their AI processors, which includes essential foundational wafers, or base dies, provided by TSMC to make the stack function. Micron signed an agreement with TSMC to produce the base die for these stacks, enabling them to adopt this architecture alongside Nvidia and others.

So, without its connections to TSMC, it would not have access to the advanced components for its next-generation memory chips nor to TSMC's AI architecture stacks.

Why TSMC stock is a screaming buy

These advantages have resulted in huge earnings for TSMC. In the most recent quarter, TSMC revenue increased by 34% while earnings per share rose by 77% year over year. Advanced chips accounted for 77% of the revenue.

In the third quarter, the company expects revenue to jump to about $45 billion, up 12% from the second quarter. The gross profit margin target is 66% at the midpoint of the company's forecast, down from 67.7% in Q2. The company anticipates operating margin of 57% at the midpoint, down from 60.3% last quarter.

Taiwan Semiconductor stock is already up 50% year to date and 67% during the past 12 months.

Wall Street analysts are overwhelmingly bullish, with 95% of the analysts that cover the stock rating it as a buy. There is an average price target of $535 per share on TSMC stock, which would indicate 17% upside.

What makes TSMC a screaming buy right now, in addition to its competitive advantages and essential role as an AI gatekeeper, is its valuation. Trading at a forward price-to-earnings (P/E) ratio of 21 with a five-year PEG (price-to-earnings growth) ratio of 0.86 -- a PEG ratio of less than 1 means it's undervalued relative to its long-term earnings -- TSMC stock is too cheap to pass up right now. Given its growth prospects, market dominance, and low valuation, don't be surprised to see TSMC stock continue to move higher.

Dave Kovaleski has positions in Amazon and Micron Technology. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon, Apple, Broadcom, Micron Technology, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.