Considering how well artificial intelligence (AI) stocks have done over the past two years, it's hard to imagine some of them going even higher. However, this industry still has significant tailwinds as we haven't scratched the surface of what is possible with AI.
However, picking which company will emerge as the victor in the AI arms race isn't easy; that's why I'm focussing more on companies selling the tools needed to participate in this AI arms race. One of the top companies in this realm is Taiwan Semiconductor (TSM -3.76%). Although the stock was up 90% in 2024, there's still plenty of room for upside in 2025.
Taiwan Semi is a key player in the AI arms race
Although many companies design chips and use them in their own products (think Nvidia (NVDA -2.85%) or Apple (AAPL -1.46%), they do not have the production resources to actually build these chips. Instead, they outsource this work to chip foundries like Taiwan Semiconductor. This puts Taiwan Semiconductor in a neutral position in the AI arms race, as it's often fabricating chips for competitors out of the same factory.
One area where this is evident is in GPUs (graphics processing units). GPUs have long been used for arduous computing tasks like AI model training, and Nvidia has dominated this market. However, there is plenty of competition, as AMD (AMD 0.49%) also makes GPUs filled with chips fabricated by TSMC.
This makes TSMC a top AI investment for me, as it allows me to invest in a fairly low-level company that provides products to many of the top AI players. This effect can already be seen in its financials, as AI-related revenue is expected to triple for Taiwan Semi in 2024. That's solid growth, and there are no expectations of that slowing down.
Furthermore, Taiwan Semiconductor will have a new technology later on in 2025 that will drive further sales growth. By the end of 2025, Taiwan Semiconductor will have launched its 2nm chip, setting a new performance benchmark over its current 3nm chip design. The biggest advancement in this chip isn't its power but its energy efficiency. Management estimates that these 2nm chips will be 25% to 30% more efficient than the current generation when each is configured for the same power level. That's a massive upgrade and is a key feature for products like smartphones (battery life) and data centers (GPUs consume a ton of power while being used).
There's a clear case for owning Taiwan Semiconductor stock in 2025, but do the financials support it as a stock that could rocket higher in 2025?
Growth will be strong for Taiwan Semi in 2025
Taiwan Semiconductor saw strong growth in Q3, with revenue rising 39% year over year in N.T. (New Taiwan) dollars. While we'll hear more about TSMC's performance on January 16 when it reports Q4 earnings, but we already have an idea of its revenue growth.
Taiwan Semi reports monthly revenue to investors, and the last three months to end the year were fantastic.
| Month | Revenue (N.T. Dollars) | YOY Growth |
|---|---|---|
| October | 314,240 | 29% |
| November | 276,058 | 34% |
| December | 278,163 | 58% |
Data source: Taiwan Semiconductor. Note: Revenue in millions of N.T. Dollars (New Taiwan Dollars). YOY = Year over Year.
Revenue growth is clearly strong, and these numbers indicate 39% YOY revenue growth from a New Taiwan dollar standpoint.
Wall Street analysts expect this strength to continue throughout 2025, as they project 26% growth next year. If the stock is priced right, this adds up to a stock that can see strong stock price appreciation through its business growth. At 23 times forward earnings, TSMC isn't really that expensive of a stock.
TSM PE Ratio (Forward) data by YCharts
Considering that the S&P 500 (^GSPC -0.17%) trades for 23.4 times forward earnings, Taiwan Semi is reasonably priced and primed for more upside in 2025.
Taiwan Semiconductor is a massive player in a key industry, and its leadership position will make it a worthwhile investment. The stock is well-priced and showing promising growth, so I have no doubt that it will rocket higher in 2025.
