Is Taiwan Semiconductor the brightest tech investment?

Taiwan Semiconductor (TSM 4.80%) may be one of the best investments in the tech space right now. While it has outperformed over the long term, we are just at the beginning of some of the biggest tailwinds it has experienced in recent years. But how much can investors expect from this chip maker?

Taiwan Semi has some big tailwinds coming up

Taiwan Semiconductor is in a unique position among technology companies. Because it is a contract chip manufacturer, it functions as a manufacturing partner for many competing companies. For example, make tokens for both Nvidia and Advanced microdevices. Although Nvidia currently dominates the data center GPU market, which is booming due to high demand for artificial intelligence (AI), AMD could regain some of that market share in the future. Regardless, TSMC will benefit from the overall market boom.

As a neutral investment, Taiwan Semi will have nowhere near the highs and lows of a company competing on the open market. But as long as the technology becomes more widespread, TSMC will be a successful business. This is a fairly easy and obvious investment trend to take advantage of, making Taiwan Semi one of the brightest stocks to invest in.

The company also has some significant tailwinds coming up.

First, TSMC’s biggest customer is Applewhich accounts for about a quarter of its sales in a given year — and that’s been a problem recently, as iPhones haven’t sold as well as they used to. However, now that Apple has announced its approach to AI — Apple Intelligence, which will only be available on the latest generation of phones — TSMC could see its smartphone business rebound.

Second, TSMC believes that AI-related chips will be massively successful. Management projects a compound annual growth rate of 50% through 2027. By then, AI-related chips are slated to make up more than 20% of TSMC’s total sales, which is huge growth for a new segment.

Finally, Taiwan Semi is releasing a new chip design starting in 2025. The 2 nanometer (nm) chip is TSMC’s next-generation technology, following on from the 3nm chip released last year. How much performance gain can be achieved by reducing the chip node by 1nm? Quite a lot, actually. Management claims its 2nm chip design can be configured to deliver a 10% to 15% speed improvement over the old generation at the same power consumption rate.

But that’s not why customers will buy it. The biggest improvement will come from energy efficiency. When configured at the same speed as a 3nm chip, the 2nm chip will consume an impressive 25% to 30% less power. This is a massive improvement and something that should be in high demand, especially given the power operating costs that some of these massive AI services consume. Management is already seeing higher demand for this new technology than its previous releases, the 3nm and 5nm architecture.

With so many big events on the horizon for TSMC, it’s no wonder why it’s among the best tech stocks to invest in right now.

The stock is not much more expensive than the S&P 500

Even the best companies can turn out to be disastrous investments if bought at the wrong price. Fortunately, TSMC can be bought for a fairly reasonable price.

TSM PE Ratio data (before) by YCharts

At 25 times forward earnings, TSMC barely holds a premium over the broadest S&P 500 index, which trades at 23 times forward earnings. Given TSMC’s market positioning and headwinds, I’m pretty confident it’s a much better investment than the average S&P 500 business.

As a result, I think Taiwan Semiconductor could be one of the best tech investments right now because it offers a balanced approach to take advantage of the various AI tailwinds.