If I Could Only Buy 1 Semiconductor Stock, This Would Be It

The last few days have been quite challenging for the semiconductor industry. The news of Chinese start-up DeepSeek releasing its open-source AI model DeepSeek-R1 -- which it says cost less than $6 million to create -- has triggered concerns about drastic declines in AI spending. Not surprisingly, semiconductor stocks that have benefited dramatically from the explosive global demand for AI infrastructure are suffering significant drawdowns in this tech sell-off.

However, few semiconductor stocks have been negatively affected by disproportionate fears about future AI spending. One is Taiwan Semiconductor Manufacturing (NYSE:TSM) or TSMC, which is estimated to account for 65% of the global foundry market in 2024.

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Since efficiency improvements can result in better monetization of AI technologies, many technology companies may even increase spending on AI-optimized hardware. Furthermore, semiconductors are used across sectors for multiple applications, excluding AI. Hence, as a leading foundry player, TSMC is relatively immune to variations in global AI spending, so it makes sense to consider it a compelling semiconductor pick in 2025.

There are also other reasons why TSMC can be a worthwhile investment for astute investors in 2025.

Robust financials

As the largest independent foundry in the world, TSMC has been exceptionally successful in managing growth and profitability. This is evident in that 2024 revenues soared 30% year over year to $90 billion, while gross margins expanded by 1.7 percentage points to 56.1%. Management has also provided healthy guidance for the first quarter of fiscal 2025. Revenues are expected to fall in the range of $25 billion to $25.8 billion, up 34.7% year over year at the midpoint. In comparison, gross margins and operating margins are expected to be in the range of 57% to 59% and 46.5% to 48.5%, respectively.

Thanks to its technological leadership in advanced semiconductor manufacturing and its broad customer base, TSMC's high-performance computing (HPC) segment has become its largest revenue contributor. In 2024, HPC revenues were up 58% year over year and accounted for nearly 51% of the company's total revenues. Smartphones, Internet of Things, and automotive segments contributed 35%, 6%, and 5%, respectively, to total revenues. The diversified client base makes TSMC relatively resilient to marketwide headwinds.

Technological prowess

TSMC has also been at the forefront of advanced semiconductor manufacturing. In 2024, the high-margin category of advanced process nodes accounted for 69% of its wafer revenue, up significantly from 58% in 2023. The company aims for volume production with a next-generation 2-nanometer process node in the second half of 2025. Plus, the company has introduced N2P as an extension of the 2-nanometer process node, with better performance and power efficiency. TSMC expects to commence volume production of N2P in the second half of 2026.

TSMC has planned to spend capex of $38 billion to $42 billion in 2025, with approximately 70% allocated to advanced process technologies, 10% to 20% to specialty technologies, and the remaining 10% to 20% to advanced packaging, testing, mask making, and other activities. This level of capex spending is expected to strengthen TSMC's leadership position in the global foundry market.

AI tailwinds

Undoubtedly, exceptional global demand for high-performance computing and AI applications has been a major tailwind for TSMC in recent years.

TSMC's AI accelerators (including AI-optimized graphics processing units (GPUs), application-specific integrated circuits (ASICs), and high-bandwidth memory (HBM) controllers) accounted for a mid-teens percentage of total revenue in 2024. Although this revenue has more than tripled year over year, TSMC expects AI accelerator revenues to double in 2025, driven by solid demand at data centers.

Demand for AI accelerators in edge computing or on-device AI is also booming. TSMC stands to benefit from the estimated 5% to 10% more silicon content being used in these AI-capable devices. The company also expects a replacement cycle in consumer electronics to further drive demand. Subsequently, TSMC estimates its AI accelerator revenues will grow annually at a mid-40% compound annual growth rate (CAGR) from 2024 to 2029.

Valuation

Despite its many strengths, TSMC trades at 23.7 times forward earnings. That's cheaper than peers like Nvidia and ASML, which are trading at a forward price-to-earnings (P/E) of 28.09x and 30.2x, respectively. Furthermore, analysts expect TSMC's revenues and earnings per share to grow year-over-year by 27.75% and 28.1%, respectively, in 2025. Coupled with a dividend yield of 0.94% and a healthy dividend payout ratio of just 27.3%, TSMC seems like a compelling pick in 2025.

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Manali Pradhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.