Chip investing has become a huge part of many investors' portfolios, whether they understand it or not. Chips are in nearly every device that consumers buy, but some of the most high-powered chips are produced by one company: Taiwan Semiconductor Manufacturing (NYSE: TSM).
Taiwan Semiconductor is the top dog in the chipmaking space, and my top stock to buy and hold in this industry. It has several key partnerships with top technology companies, and its culture of continuous improvement solidifies this thesis.
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If I could only buy one chip stock, TSMC (as it's commonly called) would be it. If you don't own shares right now, there's good news: The stock is reasonably priced.
It has best-in-class technology
Taiwan Semiconductor is in a great position in the chip industry as a contract manufacturer. TSMC doesn't have to market its chips; instead, companies like Apple or Nvidia come to it to have the chips that they've designed for their own products made. As a result, Taiwan Semi is only competing against other foundry businesses, where it has already established itself at the top of this industry.
Taiwan Semiconductor can produce the most advanced chips in the world right now: 3 nanometer (nm) chips. However, just because it can make the best right now doesn't mean that it's stopping. It's already developing 2nm and A16 processes, which are more powerful chips than its 3nm predecessors.
These next-gen chips can be configured for more computing power, but their biggest breakthrough is energy consumption. The 2nm chip, when configured for the same computing power, consumes 20% to 30% less power than the 3nm variety. Its A16 has a similar line of thinking, as it would provide a 15% to 20% power consumption improvement over the 2nm chip. Taiwan Semi will start production of 2nm chips later this year, while A16 is scheduled for the second half of 2026.
Even though TSMC's chips are some of the best available right now, that does not stop it from producing further technologies, which is why I'm a huge fan of this stock. However, there are also some risks involved.
It isn't a risk-free investment
While Taiwan Semi's market positioning is fantastic, its geographic location may not be. Because of the complex China-Taiwan relationship, there's a constant fear of mainland China taking full control over Taiwan, which would obviously be a huge problem for the company (and thus the stock). On top of that, President Donald Trump has threatened tariffs on Taiwan-made chips, which could cause some clients to switch foundries.
However, TSMC has anticipated these concerns and is already ahead of both issues. TSMC has expanded its fabrication locations beyond the island of Taiwan and has production facilities in Arizona and Japan, with plans to build one in Germany.
The Arizona facility is producing 4nm chips, but TSMC is already working on building a second and third fabrication in the U.S. to produce 3nm, 2nm, and its A16 chips. I think this quells the fears of tariff concerns, as TSMC is already working toward raising U.S. chip production, which is the ultimate goal of President Trump's potential tariffs.
Furthermore, the international conflict that a China invasion would have could destabilize the world and cause a widespread conflict, something that China likely wants to avoid. And the effects of a Chinese invasion of Taiwan would undoubtedly crash the entire stock market. These fears and concerns are real, but TSMC has already positioned itself to mitigate the effects of either event.
The stock looks reasonably priced
Considering that TSMC is a vital supplier and is projected to grow its revenue by 28% in 2025 and 19% in 2026, you'd think it would fetch a premium price, but it doesn't. Taiwan Semiconductor's stock trades for 22.4 times forward earnings, the exact same price that the S&P 500 trades at right now.
TSM PE Ratio (Forward) data by YCharts
After considering Taiwan Semi's market position and growth, it's clear that TSMC isn't a market-average stock. As a result, I think it's a phenomenal buy, and investors should consider adding this long-term winner to their portfolio.
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Keithen Drury has positions in Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Apple, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
