3 Reasons Taiwan Semiconductor Is A Must-buy For Long-term Investors

Chip stocks got hit hard on Monday in response to the launch of the Chinese artificial intelligence (AI) chatbot DeepSeek. Several major AI stocks saw double-digit, one-day losses.

Investors were shaken as the creators of DeepSeek were able to build a model as capable as OpenAI's ChatGPT and other industry-leading chatbots with less powerful chips and at a significantly lower cost. That set off a bloodbath in the broader tech industry as investors reacted to the possibility of stronger competition for U.S. tech giants and weaker growth for chip stocks.

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This threat of falling chip prices and demand sent Taiwan Semiconductor (NYSE: TSM) plunging 13.3% on Jan. 27.

However, the sell-off seems to be a overreaction. The impact of DeepSeek is still unclear, and greater efficiencies in the building and training of AI models could actually lead to increased overall demand for the technology and the semiconductors that power them.

In other words, the sell-off could be a good buying opportunity for Taiwan Semiconductor, which has been a longtime winner in the market. Keep reading to see three reasons to buy the stock.

1. It dominates a vital market

Taiwan Semiconductor might be the most powerful company most investors have never heard of.

The company operates behind the scenes in the tech industry, manufacturing chips for partners like Apple, Nvidia, Broadcom, and AMD. It's the world's largest third-party chip manufacturer by a wide margin. TSMC manufactures a majority of the contract chips in the world, and it has a market share of around 90% for advanced chips.

Semiconductors are vitally important in the global economy, which means TSMC plays a key role in a wide range of products, including consumer electronics, appliances, and infrastructure.

That technological strength gives the company a significant competitive advantage, and rivals like Intel and Samsung have faltered lately, allowing it to gain market share.

2. Its financial results continue to impress

In the AI era, TSMC's growth has accelerated, and its profit margins have expanded.

Revenue jumped 39% in the fourth quarter to $26.9 billion, and it reported an operating margin of 49.0%, up from 41.6% in the year-ago quarter. The company has benefited from higher chip prices and the increasing share of revenue from advanced chips.

TSMC issued strong guidance for the first quarter, but there's a better reason to bet on the stock over the long term. It's rapidly opening up new fabs around the world, including in the U.S. (Arizona and Ohio), Europe, and Asia, and it's set to receive at least $6.6 billion in funding from the CHIPS Act. These investments position the company continue leading the industry while reducing the risks of having its production footprint concentrated in Taiwan.

3. The price is right

Finally, Taiwan Semiconductor is trading at an attractive valuation right now. Chip stocks traditionally trade at a lower valuation than software stocks because they're more susceptible to industry cycles. But given its growth rate, the stock looks like a steal right now with its price-to-earnings ratio of 28, which matches that of the S&P 500.

Whatever risks the company is facing with DeepSeek, other headwinds in AI, or the cyclical nature of the semiconductor industry, they seem more than sufficiently priced in at the current valuation.

Altogether, Taiwan Semi has a wide economic moat in an essential industry that it dominates. With strong prospects in the AI era and the stock this attractively priced, TSMC looks like a great long-term buy.

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Jeremy Bowman has positions in Advanced Micro Devices, Broadcom, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.