If You're Solely Invested in the Vanguard S&P 500 ETF, You're Overlooking an Extraordinary Artificial Intelligence (AI) Semiconductor Company's Shares
One of the most common methods for investing in stocks is by purchasing a diverse portfolio fund such as the Fidelity ZERO Total Market Index Fund (FZROX 1.13%). This strategy allows you to spread your investment across numerous companies, ensuring you don't miss out on significant trends that contribute to stock market growth for extended periods.
Currently, the primary driver boosting the S&P 500 (^GSPC 1.09%) is the boom in artificial intelligence (AI). This surge in interest has significantly increased the stock prices of tech giants like Nvidia, Alphabet, or Meta Platforms. If you've invested in a portfolio fund like the Fidelity ZERO Total Market Index Fund, a portion of your investment goes towards these companies.
However, by relying solely on a portfolio fund, you may be missing out on a top-tier AI semi conductor stock that isn't part of the S&P 500. The stringent criteria for inclusion in the index usually exclude such stocks from an investor's portfolio. Nevertheless, it's not too late to include shares of this undervalued company, such as Taiwan Semiconductor Manufacturing Company Limited (TSM 1.32%).
The Leading Chip Manufacturer Worldwide
Taiwan Semiconductor Manufacturing Company (TSMC) is the world's largest chip foundry, accounting for approximately 60% of global chip manufacturing spending.
TSMC's advanced chip manufacturing capabilities enable it to produce the most sophisticated chips in the industry. Consequently, tech giants like Nvidia, Alphabet, or Meta turn to TSMC to produce chips for their newly developed AI technology.
Nvidia CEO Jensen Huang highlighted TSMC's exceptional capabilities, stating that it's "the world's best... by an incredible margin." Despite having the capability to manufacture its chips elsewhere, Huang explained the compromises in performance and cost, opting instead to work with TSMC.
The company boasts a wide range of prominent clients, including both Meta and Google, which utilize TSMC's manufacturing services for their AI-powered innovative chips. Apple's AI-driven technologies, including Apple Intelligence, also rely on TSMC's manufacturing abilities. Apple remains one of TSMC's largest clients, with TSMC chips powering its entire line of devices.
TSMC's extensive customer portfolio fuels a self-sustaining cycle of growth. The large influx of business allows TSMC to invest substantially in research and development, enabling it to maintain a technological lead over its competitors. This, in turn, attracts more business from tech giants like Nvidia, ensuring that TSMC stays ahead of the competition.
The increasing demand for advanced AI chips has positioned TSMC in an advantageous position. Its size and production capabilities enable it to meet this growing demand. Furthermore, the company reported impressive third-quarter earnings results, with revenue surging 39%, and earnings growing 54% year over year.
TSMC is also planning to invest heavily to meet future high-demand growth expectations. Management projects that capital expenditures will increase in 2025 as it expands its capacity and begins commercial production at its Arizona facility. These developments suggest another strong year for TSMC.
A Strong Value Proposition in Artificial Intelligence
Though index investors missed out on TSMC's impressive 90% return in 2024, the opportunity to invest in the company is still available. Shares presently trade at an affordable 24 times analysts' consensus expectations for 2025 earnings, barely surpassing the S&P 500's valuation and significantly below the valuations of other prominent AI stocks like Nvidia.
Crucially, TSMC is projected to generate earnings growth of more than 20% over the next five years, making its price-to-earnings ratio an attractive investment proposition relative to its growth potential.
At the time of writing, TSMC's market capitalization exceeds $1 trillion. This substantial valuation would result in significant representation within the S&P 500 if the company were eligible for inclusion. Index investors looking to maintain a market-cap weighted exposure to TSMC while still incorporating it into their portfolio could consider investing an approximately 1.7% proportion of their Vanguard S&P 500 ETF holdings in TSMC shares.
Even if you're not an index investor, TSMC could represent an excellent addition to your portfolio.
If you're interested in investing in AI-related sectors beyond the S&P 500, considering Taiwan Semiconductor Manufacturing Company (TSM) could be beneficial. Despite its strong performance, TSM's current valuation is still lower than its growth potential, making it an attractive investment option for those looking to diversify their portfolio in the finance sector.
Additionally, by investing in individual stocks like TSM, you have the potential to capitalize on opportunities that might be overlooked by portfolio funds that focus on larger market indices. This approach allows for a more targeted investment strategy, focusing on specific sectors or companies that show promising growth prospects, such as TSMC in the AI semiconductor market.
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