Taiwan Semiconductor seen as near-certain AI winner at 23 times forward earnings

Taiwan Semiconductor's position as a foundry for Nvidia, AMD, and Broadcom means it sits at the center of the AI chip supply chain, even though it does not design the chips itself. No other foundry has the capacity to serve as a viable alternative, which helps explain how TSMC captured 72.5% of global foundry revenue in Q2. That concentration gives its largest customers few reasons to switch, especially given its reputation for production yields.

Looking ahead, the company has projected that revenue from its AI chip business will grow at a compound annual rate in the mid-to-high 50% range from 2024 to 2029, and on the Q3 conference call the CEO indicated that growth rate probably will be higher. If that projection holds, shareholders would benefit immensely. On valuation, the stock trades at 23 times forward expected earnings, which the author describes as a discount to its typical level at this time of year. The combination of dominant market share and what the author calls a timely valuation is the basis for his conclusion that TSMC is practically guaranteed to do well, though he acknowledges it may not provide the best long-term AI returns.