In This Article:
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While major indexes have been gaining lately, many AI stocks have yet to fully recover from their previous sell-offs.
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The rise in spending on data centers and chipsets bodes well for semiconductor businesses.
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While Nvidia and its peers remain tempting buys, Taiwan Semiconductor Manufacturing is my top choice.
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10 stocks we like better than Taiwan Semiconductor Manufacturing ›
The technology sector has faced quite a bit of pressure so far in 2025. Just two months ago, the Nasdaq Composite was down over 20% year to date following President Trump's "Liberation Day" tariff announcement on April 2. Only after a steep recovery since late April has the index been able to return to breakeven.
In this volatile environment, some tech stocks are still trading at attractive valuations, and Taiwan Semiconductor Manufacturing (NYSE: TSM) stands out in the sea of enticing artificial intelligence (AI) stocks. Could it be the best bargain in the market right now?
When it comes to AI semiconductor stocks, there is no shortage of positive narratives surrounding the usual suspects: Nvidia, Advanced Micro Devices, and Broadcom. These companies design graphics processing units (GPU) and integrated network equipment for data centers. This hardware is essential for developing generative AI applications, and megacap behemoths such as Microsoft, Alphabet, Amazon, and Meta Platforms can't seem to buy enough of it.
But Nvidia, Advanced Micro Devices, and Broadcom are "fabless" chip companies -- they don't physically make their own chips. They outsource that part of the process to companies like Taiwan Semiconductor, also known as TSMC, which turn their GPU designs into actual tangible products.
When it comes to foundry services, TSMC competes with smaller players such as United Microelectronics and GlobalFoundries, as well as the likes of Intel and Samsung, which are integrated device manufacturers (i.e., they handle design, fabrication, and assembly in house). However, given that TSMC has an estimated market share of nearly 60% in the third-party foundry segment, competitors have a long, uphill climb to catch up to its leading fabrication operation.
According to a recent report from global management consulting firm McKinsey & Company, data center spending could reach $6.7 trillion over the next five years, and $5.2 trillion of that amount will go to AI-related infrastructure with the following breakdown: