Key Points
Taiwan Semiconductor's main competitive advantage is its manufacturing ability.
TSMC has a monopoly on manufacturing advanced artificial intelligence (AI) chips.
The company's profit growth has outpaced revenue growth over the past three years.
- 10 stocks we like better than Taiwan Semiconductor Manufacturing ›
The artificial intelligence (AI) ecosystem has many working parts, ranging from cloud providers to chip designers to hardware makers, and more. There are many companies with their hands in the same pot, increasing the need for companies to establish a competitive advantage.
One tech company, however, that stands in a league of its own in the AI world is Taiwan Semiconductor Manufacturing (NYSE: TSM) --- also known as TSMC. It might not be the first company that comes to mind when you think of an AI stock, but you could argue that it's one of the most important companies in the AI world.
Will AI create the world's first trillionaire? Our team just released a report on the one little-known company, called an "Indispensable Monopoly" providing the critical technology Nvidia and Intel both need. Continue »
Image source: The Motley Fool.
What TSMC does better than everyone else
On a simple level, the goal of a semiconductor manufacturer is to continually make chips smaller and more powerful. The powerful part is straightforward, but the size aspect matters a lot too, because smaller chips make electronics more energy-efficient and increase the computing power per unit of space.
TSMC's main competitive moat is its manufacturing ability. No company is on its level when it comes to manufacturing at its scale and precision. And it's not something that can be duplicated overnight or even in a few years. It takes countless billions, specialized engineering talent, and years of development.
The company considers chips at 7-nanometer (7nm) or smaller to be advanced. In the first quarter (Q1), 74% of TSMC's revenue came from advanced chips. A quarter of the revenue came from 3nm chips, and the company says its 2nm chip family is ramping up production. Each time TSMC reaches another milestone, its competitive advantage strengthens.
How has TSMC's ability paid off?
By separating itself on the ability front, TSMC has put itself in a lucrative position. Whether it's Nvidia, Broadcom, Alphabet, Amazon, or whoever, they all essentially have to go to TSMC to manufacture their chips. Switching to a competitor would mean risking lower yields (the percentage of chips that work as intended) and less performance.
At the end of last year, TSMC's market share was 70.4%, according to TrendForce research. The next-closest competitor was Samsung Electronics, at 7.1%. The gap widens significantly when looking at advanced AI chips. TSMC manufactures virtually all of those.
As the only game in town, TSMC has been able to increase prices and improve its profits and margins. In just the past three years, its net income and operating income (cash from core operations) have risen 206% and 216%, respectively, outpacing revenue growth.
TSM Net Income (Quarterly) data by YCharts
You get what you pay for
AI is getting much of the attention right now, but even without current demand, TSMC will remain the go-to for chips used in smartphones, laptops, cars, and countless other electronics. It's a stock I'm doubling down on and one I plan to hold on to for quite a while.
The stock is as expensive as it's been since 2021 (trading at 36.6 times earnings as of June 3), but it's a premium price for a premium company that's worth paying.
Should you buy stock in Taiwan Semiconductor Manufacturing right now?
Before you buy stock in Taiwan Semiconductor Manufacturing, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Taiwan Semiconductor Manufacturing wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you’d have $439,847!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $1,342,065!*
Now, it’s worth noting Stock Advisor’s total average return is 968% — a market-crushing outperformance compared to 211% for the S&P 500. Don't miss the latest top 10 list, available with Stock Advisor, and join an investing community built by individual investors for individual investors.
*Stock Advisor returns as of June 6, 2026.
Stefon Walters has positions in Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Broadcom, 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.
