Capitalizing on the AI Infrastructure Boom: Why TSMC Is the Undervalued Must-Own Stock

The global semiconductor industry is undergoing a seismic shift, driven by the explosive growth of artificial intelligence (AI) and high-performance computing (HPC). At the epicenter of this transformation is Taiwan Semiconductor Manufacturing Company (TSMC), the world's leading foundry. With a staggering 70.2% market share in the second quarter of 2025, TSMC has cemented its dominance, outpacing competitors like Samsung (7.3%) and SMIC (5.1%). This unparalleled position, combined with its strategic alignment with AI-driven demand, makes TSMC a compelling investment opportunity-even as its valuation appears to lag behind its fundamentals.

Foundry Dominance: A Structural Advantage

TSMC's dominance is not accidental but a result of its relentless innovation in advanced process nodes. The company's 3nm and 5nm technologies, which together account for 74% of its wafer revenue, are the backbone of cutting-edge AI and HPC chips. These nodes are critical for clients like NVIDIA, Apple, and AMD, which rely on TSMC to manufacture GPUs, CPUs, and AI accelerators powering data centers and consumer devices.

The company's leadership in advanced packaging technologies, such as Chip-on-Wafer-on-Substrate (CoWoS), further solidifies its competitive edge. CoWoS enables the integration of multiple chips into a single package, a necessity for next-generation AI systems. As of Q2 2025, TSMC's market share in the "foundry 2.0" segment-encompassing advanced packaging and heterogeneous integration-has surged to 44% year-over-year. This technological moat ensures that TSMC remains indispensable to its clients, even as global supply chains evolve.

AI-Driven Demand: A Tailwind for Growth

The AI infrastructure boom is TSMC's most significant growth catalyst. In Q3 2025, the company reported a 39% year-on-year profit increase to NT$452.3 billion ($14.77 billion), with AI and HPC chips contributing 57% of total revenue. This surge reflects the insatiable demand for AI GPUs and ASICs from hyperscalers, cloud providers, and enterprise clients.

TSMC's CEO, C.C. Wei, has noted that AI demand is growing faster than anticipated, with NVIDIA and OpenAI leading the charge. According to market analysis, the company has raised its 2025 revenue growth forecast to the mid-30% range, a testament to its confidence in sustaining this momentum. Analysts project that global AI infrastructure spending will exceed $1 trillion in the coming years, with TSMC poised to capture a disproportionate share due to its technological superiority and customer relationships.

Valuation Discrepancy: A Hidden Opportunity

Despite its robust growth, TSMC's valuation appears to trail its peers. As of 2025, the company trades at a P/E ratio of 23.9x to 22.7x, significantly below the U.S. semiconductor industry average of 36.1x to 39.5x and its peer group average of 67.3x to 68.8x. This gap suggests that TSMC is undervalued relative to its fundamentals, particularly when compared to companies with less predictable growth trajectories.

While some valuation models, such as discounted cash flow (DCF), argue that TSMC is trading 9% to 15% above intrinsic value, these analyses often fail to account for the company's long-term structural advantages. TSMC's ability to scale advanced nodes, its dominant market share, and its critical role in the AI ecosystem provide a margin of safety that justifies a premium valuation. Moreover, its forward P/E ratio-when adjusted for expected revenue growth-aligns more closely with its fair value as estimated by regression-based models (43.9x to 46.5x).

Conclusion: A Must-Own for the AI Era

TSMC's combination of technological leadership, market dominance, and alignment with AI-driven demand positions it as a cornerstone of the semiconductor industry. While its current valuation may appear modest, this reflects a market that has yet to fully price in the scale of its future earnings potential. For investors seeking exposure to the AI infrastructure boom, TSMC offers a rare blend of defensiveness and growth-a stock that is not just undervalued but strategically essential in the decades ahead.