Nvidia has become synonymous with the term “semiconductor,” but there’s another player looming in the background that could emerge as a more lucrative opportunity in the long run.
When it comes to the semiconductor industry, no other company has become as well-known as Nvidia. The company specializes in designing graphics processing units (GPU), a unique piece of hardware architecture that’s used for all sorts of generative AI applications.
With that said, even the biggest stars have their supporting cast. While Nvidia gets all the glory in the artificial intelligence (AI) landscape, the company has to credit Taiwan Semiconductor Manufacturing (TSM -0.50%) for a lot of its success.
Let’s look at what makes Taiwan Semi such a unique investment opportunity in the AI realm and explore why the company’s long-term picture looks incredibly robust.
Exploring Taiwan Semiconductor’s position in the AI landscape
Taiwan Semiconductor specializes in the fabrication processes that bring GPUs to life. While Nvidia, Advanced Micro Devices, and many more design chips, these companies outsource much of the manufacturing process to TSMC.
According to its annual report, Taiwan Semi works with several big-name semiconductor companies and cloud computing hyperscalers including Amazon, Broadcom, Qualcomm, Sony, and of course, AMD and Nvidia.
Image source: Getty Images
Why the long-term picture looks robust for Taiwan Semiconductor
According to Mordor Intelligence, the global total addressable market (TAM) for GPUs is expected to grow at a compound annual growth rate (CAGR) of 33% between 2024 and 2029 — reaching a size of $274 billion by the end of the decade.
Moreover, considering Nvidia’s upcoming Blackwell chips and next-generation Rubin GPUs scheduled for 2026, combined with AMD’s rival AI accelerators and upcoming launches of chipsets made by Microsoft, Meta Platforms, Amazon, and Alphabet, I think TSMC has an opportunity to acquire incremental market share as demand for GPUs continues to rise.
Looking at Taiwan Semiconductor’s valuation
As of market close on Dec. 20, shares of TSMC have gained nearly 90% in 2024 — absolutely dominating the S&P 500 and Nasdaq Composite indexes. And yet, even with such market-beating gains, there’s an argument to be made that shares of Taiwan Semi are undervalued.
Right now, TSMC trades at a forward price-to-earnings multiple (P/E) of 22.2. To put this into perspective, this multiple is nearly identical to the forward P/E of the S&P 500 (^GSPC 1.10%). Looked at a different way, investors are essentially valuing the potential of an investment in TSMC, versus that of the broader market, to be the same.
I only see two legitimate risk factors surrounding Taiwan Semi. The first and more obvious topic to consider revolves around geopolitical tensions between Taiwan and China. The second and more subtle thing to keep in mind is that TSMC’s primary competitor Intel could witness some tailwinds in its own foundry business under the incoming Trump administration, thanks to a campaign promise of investing more in domestic manufacturing.
Given the alignment between TSMC’s forward P/E and that of the S&P 500, I’m wondering if investors have priced in some of these risk factors with Taiwan Semiconductor stock.
Whatever the case, I see an investment in TSMC as far superior to that of the broader capital markets. I think the tailwinds fueling the AI narrative are too much to gloss over, and I’d argue that the semiconductor industry is the core engine powering the AI market, in general.
At its current valuation, TSMC seems to be an outright bargain. I encourage investors with a long-term time horizon to consider buying the stock hand over fist and prepare to hold it for years to come.
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. 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. Adam Spatacco has positions in Alphabet, Amazon, Meta Platforms, Microsoft, and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Intel, Meta Platforms, Microsoft, Nvidia, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls on Microsoft, short February 2025 $27 calls on Intel, and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
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