Semiconductor manufacturing in Taiwan (TSM 2.78%) caught fire recently. After the company reported its third-quarter results on October 17, the stock jumped 10% on the strength of the business.

Noise like this might discourage some investors from buying Taiwan Semi shares because they think they’ve missed the boat. However, this is far from the case, as there are still plenty of good reasons to buy the stock, even after the market’s reaction to the earnings.

New technology will support TSMC’s growth for many years

Taiwan Semiconductor is the world’s leading chip manufacturing company. It makes chips that go into AppleiPhones, NvidiaGraphics processing units (GPUs) and essentially any other technologically advanced device.

Because Taiwan Semi is a chipmaker, it doesn’t choose sides in any of the current tech races. Instead, an investment in Taiwan Semiconductor is essentially a bet that consumers will use more advanced digital devices in the future. It seems like an obvious investment, and the company’s results back it up.

In the third quarter, Taiwan Semi’s revenue increased 36% year-on-year to $23.5 billion. Twenty percent of that revenue came from 3 nanometer (nm) chip technology, the company’s most advanced product. Accelerating this quickly is quite impressive, as 3nm chips only started contributing to Taiwan Semi’s revenue in the third quarter of last year.

This should also get investors excited about TSMC’s upcoming launch of 2nm chips. N2 chips are expected to launch in 2025 and ramp up in 2026, and this technology is expected to enable massive efficiency gains. Although these chips only provide a 10-15% power increase when configured to consume the same amount of power, they provide a 25-30% efficiency increase when configured at the same power level than 3nm chips.

With power consumption (especially with artificial intelligence (AI)-related chips) becoming a major issue, these 2nm chips and the products they integrate could become much-needed upgrades, as they could be amortized through energy savings. Preliminary demand for 2nm chips already exceeds that of its predecessors (3nm and 5nm technologies), so it is clear that its customers are also excited about this launch.

Although not expected to launch until 2025 (with a ramp-up in 2026), it lets investors know that a 10% one-day move in TSMC stock is not a reason to avoid trading. ‘buy the stock. New products bring huge tailwinds, and TSMC hasn’t yet begun to scratch the surface of how AI-related chips will drive its business.

AI chips are in high demand

In the first quarter, management indicated that sales of AI-related chips would grow at a compound annual growth rate (CAGR) of 50% over the next five years. After this growth, they expected it to represent more than 20% of the company’s total revenue.

However, this showing may have been a bit slow. Just two quarters later, management raised its forecast that AI chips would account for about 15% of its revenue in 2024, as revenue more than tripled year over year. the other. This shows how huge AI is becoming for the company, and it’s pretty obvious that it will account for over 20% of Taiwan Semi’s business, much faster than expected.

All this AI enthusiasm has inflated TSMC’s valuation, pushing it to 32 times current earnings and 23 times 2025 earnings.

Price/earnings ratio TSM data by Y charts.

Historically, this has been an expensive assessment. However, Taiwan Semi is also experiencing some of the fastest growth it has seen in the past decade. While Wall Street analysts predict 25% growth in 2025, the valuation looks similar to 2021 and 2022, where it grew rapidly for several years.

TSM operating revenue (quarterly growth year-on-year) data by Y charts.

COVID-related demand for chips boosted TSMC’s sales in those years, but its revenue exploded when that demand was met. I don’t expect demand for AI to see the same decline for some time, so paying a slightly high price for Taiwan Semi’s stock is fine with me.

Taiwan Semiconductor isn’t really a value play, but it has a ton of growth ahead. So, I don’t worry about a one-day or a month-long race because I focus on the long term. As TSMC’s long-term prospects are excellent, I am a confident buyer of the stock.