The last few days have been quite challenging for the semiconductor industry. The news of Chinese start-up DeepSeek releasing its open-source AI model DeepSeek-R1 — which it says cost less than $6 million to create — has triggered concerns about drastic declines in AI spending. Not surprisingly, semiconductor stocks that have benefited dramatically from the explosive global demand for AI infrastructure are suffering significant drawdowns in this tech sell-off.
However, few semiconductor stocks have been negatively affected by disproportionate fears about future AI spending. One is Taiwan Semiconductor Manufacturing (NYSE: TSM) or TSMC, which is estimated to account for 65% of the global foundry market in 2024.
Since efficiency improvements can result in better monetization of AI technologies, many technology companies may even increase spending on AI-optimized hardware. Furthermore, semiconductors are used across sectors for multiple applications, excluding AI. Hence, as a leading foundry player, TSMC is relatively immune to variations in global AI spending, so it makes sense to consider it a compelling semiconductor pick in 2025.
There are also other reasons why TSMC can be a worthwhile investment for astute investors in 2025.
As the largest independent foundry in the world, TSMC has been exceptionally successful in managing growth and profitability. This is evident in that 2024 revenues soared 30% year over year to $90 billion, while gross margins expanded by 1.7 percentage points to 56.1%. Management has also provided healthy guidance for the first quarter of fiscal 2025. Revenues are expected to fall in the range of $25 billion to $25.8 billion, up 34.7% year over year at the midpoint. In comparison, gross margins and operating margins are expected to be in the range of 57% to 59% and 46.5% to 48.5%, respectively.
Thanks to its technological leadership in advanced semiconductor manufacturing and its broad customer base, TSMC’s high-performance computing (HPC) segment has become its largest revenue contributor. In 2024, HPC revenues were up 58% year over year and accounted for nearly 51% of the company’s total revenues. Smartphones, Internet of Things, and automotive segments contributed 35%, 6%, and 5%, respectively, to total revenues. The diversified client base makes TSMC relatively resilient to marketwide headwinds.
TSMC has also been at the forefront of advanced semiconductor manufacturing. In 2024, the high-margin category of advanced process nodes accounted for 69% of its wafer revenue, up significantly from 58% in 2023. The company aims for volume production with a next-generation 2-nanometer process node in the second half of 2025. Plus, the company has introduced N2P as an extension of the 2-nanometer process node, with better performance and power efficiency. TSMC expects to commence volume production of N2P in the second half of 2026.
