This stock has major upside potential and is relatively cheap.
AI stocks have been driving the markets for several years now, but lately concerns have re-emerged about their soaring valuations. Some experts believe we may be in an AI stock bubble.
But there are still some good deals out there among AI stocks, including Taiwan Semiconductor (NYSE:TSM). Taiwan Semiconductor has many of the key attributes of a stock poised for growth – a relatively low valuation, a market leading position, and growth catalysts.
Taiwan Semiconductor is the leading semiconductor chip foundry, which means it makes AI chips for other companies that design them, like Nvidia, Apple, Broadcom, AMD, Intel, Qualcomm, and others. It is by far the most dominant player, with about 70% of the market share.
Taiwan Semi stock is up about 14% year-to-date and it has been a long-term juggernaut. Over the past five years it has had an average annualized return of 23% per year, and over 10 years, it has returned 28% per year.
Why Taiwan Semiconductor stock can keep rising
Taiwan Semiconductor is well-positioned to maintain its dominance and increase its share price.
One of the major reasons is that, unlike other leading AI players, Taiwan Semi stock is still relatively cheap. The stock is trading at just 25 times earnings, which is below the average P/E of the Nasdaq Composite and S&P 500. Its valuation is actually down from a year ago when it had a P/E ratio of 20.
It also has a low forward P/E ratio of 20, which suggests that its an even better value relative to its future earnings.
Taiwan Semi has maintained its incredible growth, with revenue rising 22% in July, over June, and 28% year-over-year. In Q2, revenue jumped 39% year over year while earnings soared 61%. Further, it raised its revenue outlook for the full fiscal year to 30%, up from earlier projections of 20% growth.
And the long-term outlook is strong, as Taiwan Semi has received $6.6 billion in funding from the Chips and Science Act to build three new chips plants in Arizona, along with two advanced packaging facilities, and an R&D team center. The total investment in U.S. chip manufacturing is about $65 billion.
Wall Street analysts are bullish
Another potential catalyst for Taiwan Semi could be the deal that the Trump Administration struck with Intel to buy a 10% stake in the company. Intel is trying to ramp up its foundry business, but the government stake could lead to a backlash against Intel, particularly among foreign investors. Intel stock sank in the days after the announcement while Taiwan stock jumped.
Taiwan Semiconductor stock is listed as a buy by 96% of the analysts that cover it. The stock has a median price target of $275.50 per share, which suggests 20% upside for the stock.
Taiwan Semiconductor is one AI stock to put on your radar.
