TSMC Dominates AI Chip Manufacturing, Achieves Record Revenue, Yet Remains Undervalued
Table of Contents
Despite not being a household name, Taiwan Semiconductor Manufacturing Company (TSMC) is arguably the most critical player in the artificial intelligence (AI) revolution. The world’s largest semiconductor foundry, TSMC (NYSE: TSM) holds a near-monopoly on the manufacturing of advanced AI chips, a position that fueled a record-breaking financial year and positions the company for continued growth.
The Engine of the AI Revolution
While companies like Nvidia and Advanced Micro Devices (AMD) design the chips that power AI applications, TSMC is the manufacturing powerhouse that brings those designs to life. Without TSMC’s capabilities, the entire AI supply chain would face significant disruption. “TSMC is the most dependable company in the business,” one analyst noted, highlighting the critical role the foundry plays for its clients.
TSMC’s expertise lies in its unparalleled efficiency, scale, precision, and yield – the percentage of chips produced that function as intended. This dependability makes it the go-to choice for companies requiring cutting-edge semiconductor fabrication. The company’s focus has shifted from primarily serving the smartphone market to capitalizing on the burgeoning demand for advanced AI chips used in data centers, now commanding a market share exceeding 90%.
A Landmark Year for TSMC
2025 proved to be a watershed year for TSMC, with the company generating $122.4 billion in revenue – a nearly 36% increase from 2024. This marked the first time TSMC surpassed $100 billion in annual revenue, and it did so with a substantial margin.
The company’s financial performance wasn’t limited to revenue growth. TSMC also demonstrated impressive margin expansion, with its gross margin increasing from 56.1% to 59.9% and its operating margin rising from 45.7% to 50.8%. In the fourth quarter alone, gross and operating margins reached 62.3% and 54%, respectively. This combination of revenue growth and margin expansion underscores TSMC’s operational excellence and its ability to command premium pricing due to its virtual monopoly in advanced AI chip manufacturing.
Valuation Discrepancy: A Potential Opportunity
Despite a 69% increase in its stock price since the beginning of 2025 (as of January 22), TSMC currently trades at a price-to-earnings (P/E) ratio of 25, based on projected earnings. This valuation is significantly lower than its competitors in the semiconductor industry, including Broadcom, Intel, and Nvidia.
[Insert TSM PE Ratio (Forward) Chart from YCharts here]
Considering TSMC’s market dominance, pricing power, and substantial growth opportunities, many believe its current valuation represents a compelling opportunity for long-term investors. While the stock is trading at a premium compared to its historical average, the company’s current position is demonstrably stronger than it has been in years. “TSMC is a stock that I’d feel comfortable holding for the long haul,” one investor stated.
Investment Considerations
While TSMC appears to be a strong investment, it’s important to note that the Motley Fool Stock Advisor analyst team did not include it in their recent list of top 10 stocks. The team highlighted past successes, noting that a $1,000 investment in Netflix in December 2004 would now be worth $464,439, and a similar investment in Nvidia in April 2005 would be worth $1,150,455. Stock Advisor’s overall average return of 949% significantly outperforms the S&P 500’s 195%. Investors can explore the latest top 10 stock picks and join an investing community at Stock Advisor.
Disclaimer: Stefon Walters has positions in Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Advanced Micro Devices, Intel, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
