Taiwan Semiconductor Manufacturing Is Down 35%. Here's Why Now Could Be the Best Time to Buy the AI Stock.

Conditions continue to work in favor of Taiwan Semiconductor Manufacturing (TSMC) (NYSE: TSM). The world's largest chip producer already controls two-thirds of the foundry market, according to TrendForce. Moreover, with artificial intelligence (AI) demand growing at a rapid clip, the need for the chips it produces only continues to rise.

Unfortunately, the healthy state of TSMC's business did not prevent a 35% drop in the stock price since January. However, with industry leadership and a diverse and desired client base, the short-term forces hammering TSMC stock are more likely a buying opportunity than a sign of a longer-term decline, and here's why.

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The state of TSMC

Other than TSMC's equipment maker ASML, few other AI stocks are in a stronger position. As the world's most advanced chipmaker, its clients are top chip design companies, including Nvidia, Advanced Micro Devices, Qualcomm, and Apple.

This market strength has unfortunately not stopped TSMC stock from falling. Geopolitical tensions with neighboring China are on the rise, and some investors fear for the future of the company should China invade the island. Also, investors fear the effect of tariffs on the company despite the Trump administration exempting semiconductors.

Nonetheless, TSMC seems to only extend its dominance, which makes its stock attractive with its lower price. TSMC's foundry market share grew more than 2 percentage points to 67% between the third and fourth quarters of 2024.

According to multiple reports, TSMC has also entered into a joint venture with Intel, the largest chip manufacturer in the U.S. This agreement could potentially offer tremendous benefits to both companies. With the move, TSMC diversifies its manufacturing base away from the geopolitical risks it faces in Taiwan. Additionally, manufacturing in the U.S. blunts the effects of possible U.S. tariffs and pacifies Intel, which had begun to emerge as a potential competitor.

Financials remain strong

Despite the recent drop in the stock price, TSMC's financial performance should make it more attractive to buyers over the long term. In 2024, revenue of $90 billion rose by 34% from year-ago levels. With that increase, gross margin rose by 2 percentage points to 56%, a testament to the company's rising efficiency.

Additionally, operating expenses dropped slightly as a percentage of revenue. That led to a comprehensive income of more than $39 billion, a 50% increase from year-ago levels.

Still, staying on top of demand and increasing its market share requires the company to invest heavily in building and maintaining foundries. Thus, it spent almost $30 billion in 2024 on property and equipment, just slightly less than it spent in 2023. Between rising demand for the most advanced semiconductors and the push to build more foundries in the U.S., investors should expect that level of capex spending to continue.

However, investors may find it easier to overlook those high fixed costs amid a lower valuation. TSMC's P/E ratio had exceeded 30 as recently as January. Today, its earnings multiple has fallen to just 21, and the forward P/E ratio of 16 indicates its rapid profit growth is likely to continue.

Consider TSMC stock

TSMC has become the dominant company in semiconductor manufacturing, and the deep discount in the stock price amid the stock sell-off makes it an even better buy.

Investing in TSMC does bring some degree of geopolitical risk, particularly with rising trade tensions. Nonetheless, virtually all top chip companies turn to TSMC to meet their manufacturing needs. Additionally, its new partnership with Intel addresses some of the geopolitical risks while turning a potential competitor into a partner.

Considering that investors can now buy this chip stock at a heavily discounted valuation, it has become an opportune time to buy shares.

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Will Healy has positions in Advanced Micro Devices, Intel, and Qualcomm. The Motley Fool has positions in and recommends ASML, Advanced Micro Devices, Apple, Intel, Nvidia, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: short May 2025 $30 calls on Intel. The Motley Fool has a disclosure policy.