AI chip demand continues to soar in 2026.
Nvidia and Broadcom have been big beneficiaries, seeing tens of billions of dollars in additional high-margin revenue.
This semiconductor stock looks even more attractive with strong growth prospects and a low valuation.
Artificial intelligence (AI) stocks had another strong year in 2025, and many are off to great start in 2026. Semiconductor stocks have been particularly strong, with the likes of Nvidia (NASDAQ: NVDA) and Broadcom (NASDAQ: AVGO) pushing the group higher.
But one semiconductor stock that outperformed both of those behemoths is Taiwan Semiconductor Manufacturing (NYSE: TSM). TSMC, as it is also known, has seen its stock price jump 72% since the start of 2025, as of this writing, and is climbing further on stellar fourth-quarter earnings results in January. And the outlook management provided for 2026 and beyond makes the stock look even more attractive today than it did a year ago.
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TSMC is the largest contract semiconductor manufacturer in the world by a wide margin. That margin widened in 2025, with TSMC reaching 72% market share as chipmakers like Nvidia and Broadcom spent as much as needed to gain access to its advanced manufacturing capabilities. Nvidia CEO Jensen Huang said TSMC is the best semiconductor manufacturer in the world “by an incredible margin.”
Indeed, TSMC’s technology lead will be tough to catch up to. Only two other manufacturers come close, and TSMC benefits from a virtuous cycle. Its technology attracts big customers like Nvidia and Broadcom, giving it the ability to invest in additional capacity and research and development. In turn, it attracts bigger contracts and has the capacity to fulfill them, bringing in even more revenue.
The booming demand for AI chips, which use its most advanced manufacturing processes, has enabled it to increase its spending while raising prices. It instituted a price hike on a group of chips that accounted for about three-quarters of its revenue at the start of the year. It’s planning annual price hikes for those chips through 2029. Meanwhile, it’s pricing its next-generation process at a premium amid high demand.
Management is spending heavily to meet that demand. It expects capital expenditures for 2026 to come in between $52 billion and $56 billion, a 32% increase at the midpoint. Management expects that to result in an acceleration in depreciation expense starting this year, but revenue is set to grow even faster.
In fact, management raised its five-year compound annual growth rate outlook from 20% to 25% for the period starting in 2024. After 36% growth in 2025, that implies continued annual growth of around 22.4% through the end of the decade. And with strong pricing power, it should maintain a high gross margin and improve operating margin. As a result, earnings should grow even faster.
With the stock trading at less than 24 times forward earnings expectations, it still looks extremely attractive. That’s especially true when you compare it to the earnings multiples of Broadcom and Nvidia, which trade for 41 and 32 times earnings, respectively. So, even after a strong performance in 2025, investors shouldn’t expect a big slowdown for TSMC in 2026. If anything, the stock has plenty of room to run.
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Adam Levy has positions in Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
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