3 Reasons Taiwan Semiconductor Is a Must-Buy for Long-Term Investors

The recent market sell-off has created some nice bargains in the market. One stock that looks particularly attractive is Taiwan Semiconductor Manufacturing (NYSE: TSM), or TSMC for short. The stock is down more than 20% from its recent peak as of this writing.

Let's look at three reasons why TSMC is must-buy for long-term investors.

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A vital part of the semiconductor value chain

As the world's largest contract manufacturer of semiconductors, TSMC is an integral part of the industry's value chain. Today, most semiconductor companies don't manufacture their own chips; instead they outsource the manufacturing to third parties like TSMC. There are a few reasons for this.

One is that building fabs (chip manufacturing facilities) is a capital-intensive business -- it costs a lot of money and time to do so. Second, for fabs to be run profitability, they generally must operate at a high-capacity utilization rate. And finally, there is a lot of complex technology that goes into making advanced chips, and foundries (fab owners) are constantly pushing the envelope to make chips smaller.

It is this final reason why TSMC has become so important to the semiconductor industry. Today, it is the leader in chip manufacturing technology, having taken a large market share for advanced chips, such as those used in artificial intelligence (AI) infrastructure and high-performance computing (HPC). Last quarter, 88% of the chips it manufactured were for HPC or smartphones, while 74% of its revenue was derived from its more advanced technology using nodes below 7 nanometers. A node is the specific generation of chipmaking technology and generally corresponds to a chip's size. Smaller nodes lead to more transistors fitting on a chip, which leads to more processing power and increased energy efficiency.

As TSMC has pushed its technological lead, its main foundry rivals, Intel and Samsung, have struggled. This has led to TSMC not only becoming the go-to chip manufacturer for advanced chips, but it has also given the company significant pricing power. TSMC will once again raise its prices this year, further expanding its gross margin, which allows more of its revenue to turn into profits.

Image source: Getty Image.

A big beneficiary of AI infrastructure spending

As the leader in advanced chip manufacturing, TSMC is nicely benefiting from the rampant spending on AI infrastructure and the increasing number of chips going into data center servers. It counts top chip designers such as Nvidia, Broadcom, Advanced Micro Devices, and Apple among its customers.

As such, the company prospers whether hyperscalers (organizations that operate large data centers) use Nvidia's graphic processing units (GPUs) or turn more toward using custom AI chips developed with the help of Broadcom. Either way, it wins.

Meanwhile, AI infrastructure spending continues to rise. The big three cloud computing companies all plan to spend big on AI infrastructure this year, led by $100 billion in AI-focused capital expenditures (capex) by Amazon, $80 billion from Microsoft, and $75 billion from Alphabet. AI start-ups and other tech companies are also getting in on the act. Meta Platforms plans to spend up to $65 billion in AI-related capex, while OpenAI will head a group that is looking to spend $500 billion over the next few years building data centers in the U.S. as part of Project Stargate.

For its part, TSMC is continuing to build out new plants around the world to increase its capacity to help meet demand. The company recently pledged to spend an additional $100 billion over the next four years building new fabs and packaging facilities in the U.S, as well as a new development center, bringing its total U.S. investment to $165 billion.

Attractive valuation

TSMC has been growing quickly, with revenue growth of 37% in U.S. dollars and 39% in its local currency last quarter. The strong growth has continued in the first quarter thus far with TSMC seeing 36% revenue growth in January and 43% in February (both in local currency). Meanwhile, its net income rose 57% in local currency in Q4.

Despite the strong growth and outlook, TSMC still boasts an attractive valuation. The stock currently trades at forward price-to-earnings (P/E) ratio of 19.5 times based on analysts' 2025 estimates. Even its forward price/earnings-to-growth ratio (PEG) of 0.7 falls below the 1.0 threshold often used to identify undervalued stocks.

Data by YCharts.

With an attractive valuation and bright outlook, TSMC is a solid stock for long-term investors to scoop up during this market sell-off.

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Geoffrey Seiler has positions in Alphabet. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Intel, Meta Platforms, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls on Microsoft, short January 2026 $405 calls on Microsoft, and short May 2025 $30 calls on Intel. The Motley Fool has a disclosure policy.