Key Points
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Taiwan Semiconductor is one of the most dominant players in the artificial intelligence (AI) universe.
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As the leading semiconductor foundry, it makes chips for companies that design them, like Nvidia.
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It has a 90% market share in the manufacturing of advanced AI chips.
Market downturns can be hard on the nerves, but they are terrific opportunities to buy shares of good stocks at a cheap price.
It played out in the first quarter, as many of the large tech stocks tanked in the early part of the year and their valuations sank to recent lows. Investors sold when valuations got too high late last year and early this year, then bought back in in March when valuations plummeted.
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Since then, large tech stocks have been on a tear. The Nasdaq Composite has jumped 24.7% since April 1 and continues to hit new all-time highs. The S&P 500 has soared 15.9% since then to also hit new highs.
Microchips on a circuit board, bathed in blue light.
Image source: Getty Images.
Valuations are once again spiking as a result of the recent rally. The Shiller P/E ratio — which tracks earnings over 10 years, adjusted for inflation — is at a ridiculously high 42. It hasn’t been this high since 1999, just before the market crashed. The last time it was even close to this was in October 2021, when it shot to over 38. What followed was a year-long bear market that saw the Nasdaq drop 33%.
While history suggests we could be in for another crash, it’s impossible to know for sure. But if the market did crash, I know what stock I’d be all over: Taiwan Semiconductor Manufacturing (NYSE: TSM).
TSMC: The world’s chipmaker
Taiwan Semiconductor Manufacturing, or TSMC, is the world’s largest chip foundry, meaning it manufactures chips designed by other chipmakers. Among its more than 500 clients are Apple, Nvidia, Intel, Broadcom, Advanced Micro Devices, and Qualcomm, to name a few.
TSMC controls 72% of the total foundry market, and that market share has steadily risen in recent years.
But its dominance is even stronger for advanced chips used for artificial intelligence (AI) applications and data centers. In the advanced chip market, TSMC controls more than 90% of the market share. Its scale, efficiencies, and advanced packaging technologies give it a major edge over the competition.
While there are many great tech and AI stocks, TSMC’s moat and market dominance set it apart. Not only are its advantages sturdy, but the company is also agnostic toward its clients. As a pure-play foundry, it doesn’t compete with any of them, and it stands to reason that whoever the largest chipmakers are will probably use TSMC’s foundry.
TSMC has posted huge returns over the years. It’s up 40% year to date and 119% over the past 12 months. Over the past 10 years, it has averaged a 33% annualized return.
TSMC’s P/E ratio has crept up to 35, with a forward P/E of 26, which is not bad relative to many other tech stocks. But if the market corrected or crashed and the valuation dropped even a little, that would be a flashing sign to buy more shares of Taiwan Semiconductor stock.
Should you buy stock in Taiwan Semiconductor Manufacturing right now?
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Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Broadcom, Intel, Nvidia, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
