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Taiwan Semiconductor ADR(TSM-N)
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1 Semiconductor Stock You'll Regret Not Buying Right Now

Motley Fool - Fri Dec 1, 2023

At the core of high-tech devices are semiconductor chips. These integral components may be small, but they do a lot of heavy lifting. Regardless of whether you are talking about graphics processing units (GPUs) used for artificial intelligence (AI), smartphones, self-driving cars, or other technology, chances are there is a chip made by Taiwan Semiconductor Manufacturing (NYSE: TSM).

Taiwan Semiconductor is the world's largest contract chip manufacturer and has been a phenomenal investment over the past decade. However, it's currently valued near historical lows, making right now an excellent opportunity to scoop up this important company's stock.

Taiwan Semiconductor's chips are vital in many products

As the name implies, Taiwan Semiconductor is based in Taiwan. Much of the reason why the U.S. and the rest of the world don't want a Chinese takeover is largely centered around the importance of Taiwan Semiconductor. Apple's iPhones, Nvidia's GPUs, and Tesla's electric vehicles all rely on its products, showing how critical it is to just a few of the top technology companies right now.

This importance is also why it makes a great investment. Taiwan Semiconductor is a contract factory, so it doesn't market its chips. Instead, its clients design them, and Taiwan Semiconductor produces them. This allows Taiwan Semiconductor to maintain relationships with companies that would otherwise be competitors (it supplies chips to Nvidia and Advanced Micro Devices, for example).

Taiwan Semiconductor also has the best technology in the business, as its 3 nanometer (nm) chips are finally starting to generate revenue for the company. This next chip generation is more powerful and efficient than its 5 nm predecessors and demands a greater price. As companies adopt 3 nm chips, Taiwan Semiconductor's revenue will rise, boosting revenue as production ramps up.

This drive allowed Taiwan Semiconductor to become a giant, as it has continuously developed technologies that let it pack more transistors on a chip, allowing its customers to design more powerful products. Even as 3 nm production begins, Taiwan Semiconductor is already working on its next iteration: 2 nm chips scheduled to reach production in 2025.

With how important Taiwan Semiconductor is in the world, you'd think the stock would fetch a premium. But it doesn't.

The stock trades for a dirt-cheap valuation despite its obvious upside

Despite these fantastic tailwinds, Taiwan Semiconductor is trading at the low end of its historical valuation range.

TSM PE Ratio Chart

TSM PE Ratio data by YCharts

The reason? Its results haven't been that great lately. Thanks to an oversupply of chips at its clients' facilities, Taiwan Semiconductor's revenue shrunk for three quarters in a row.

However, management is confident that growth will return in 2024, especially in the second half of the year. While they're unsure if they're at the bottom of the cycle right now, they know they are near the end.

This is great news for investors, as you can get into the stock at a cheap valuation before the business turns around. Even though the stock is up 31% this year, investors should be focused on the valuation, as it shows how far a stock has to run before hitting a ceiling. By taking a position in Taiwan Semiconductor stock now with a mindset of a three- to five-year holding period, you can capture the upside of AI, EVs, and other trends that rely on the chips produced by Taiwan Semiconductor.

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Keithen Drury has positions in Taiwan Semiconductor Manufacturing and Tesla. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Nvidia, Taiwan Semiconductor Manufacturing, and Tesla. The Motley Fool has a disclosure policy.

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