Taiwan Semiconductor Manufacturing Stock Jumps On Robust AI Chip Demand. Is It Time to Sell or Double Up on the Stock?

Taiwan Semiconductor Manufacturing (NYSE: TSM) shares jumped after the semiconductor contract manufacturer once again reported strong quarterly results and issued an upbeat outlook. The stock is up around 70% over the past year, as of this writing.

Given its strong performance, let's look at its recent results to see whether now is the time to take profits, or whether investors should double up on buying the stock.

Insatiable demand for AI chips

Demand for artificial intelligence (AI) chips remains insatiable. This can be seen not only in TSMC's strong revenue growth, but in the fact that it also projected that its capital expenditure (capex) this year would rise to between $52 billion and $56 billion. That was way ahead of analyst expectations for just shy of $41 billion in 2026 capex, and demonstrates the company's conviction that the ongoing AI data center buildout will continue long into the future. Management said that leading cloud computing companies are signaling that their strong spending will continue, and that customers are continually seeking more capacity to help meet their growing demand.

TSMC is the clear leader in manufacturing advanced process nodes. Shrinking node sizes to fit more transistors onto a semiconductor is vital for increasing processing power and energy efficiency. As competitors have struggled to achieve high yields at scale, TSMC has secured a near-monopoly in the production of cutting-edge chips. In the fourth quarter, nodes 7 nanometers (nm) and under accounted for 77% of its revenue, up from 74% a year ago. Its newest 3-nm technology, meanwhile, made up 28% of its total wafer revenue, increasing from 26% a year ago.

High-performance computing (HPC) accounted for 55% of its revenue in the quarter and 58% for the full year. 2025 HPC revenue climbed 48%. Smartphone revenue made up 32% of its quarterly revenue and 29% for the year. Its smartphone revenue was up 11% in 2025.

Overall, the company's Q4 revenue jumped nearly 26% to $33.7 billion, or nearly 21% in local currency. Its earnings per American depositary receipt (ADR) surged 40% to $3.14 from $2.24 a year ago, while its earnings per share (EPS) in local currency climbed 35%.

Gross margin expanded in the quarter, rising 330 basis points to 62.3%, and operating margins rose 500 basis points to 54%. Both numbers were well ahead of TSMC's prior forecast, with it forecasting a gross margin of between 59% to 61% and an operating margin between 49% to 51%. TSMC has talked about overseas expansion eventually negatively affecting its gross margins, but it forecast first-quarter gross margins to be a robust 63% to 65% and operating margins in a range of 54% to 56%.

Meanwhile, it projected Q1 revenue to come in between $34.6 billion and $35.8 billion, representing about 38% year-over-year growth at the midpoint. For the full year, it projects revenue growth of approximately 30%.

Image source: Getty Images.

Is it time to sell TSMC stock or double up?

TSMC once again showed why it is one of the top AI infrastructure stocks to own. The company is seeing excellent revenue growth and margin expansion, helped by its strong pricing power. While its U.S. facilities will likely carry some lower margins, with a near monopoly in the manufacturing of advanced chips for AI data centers and smartphones, its gross margins are likely to remain robust.

At the same time, the company's increased capex will allow it to build out more capacity to help meet increasing demand. While AI data center demand is its biggest driver, other areas that need advanced chips, like robotaxis and robotics, may be just around the corner, as well.

Looking at valuation, TSMC trades at a forward price-to-earnings (P/E) ratio of below 21 times based on analysts' 2026 estimates, and a forward price/earnings-to-growth (PEG) ratio of 0.7. Stocks with a positive PEG ratio of less than 1 are typically considered undervalued. With an undemanding valuation and a strong growth outlook, TSMC looks more like a stock investors should be doubling up on, not selling.

Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.