By Asa Fitch
Big tech companies are tripping over themselves to get as many chips as possible to secure AI supremacy. So much so that the world's ability to make what they want is coming under growing strain.
Microsoft, Meta Platforms, Alphabet and Amazon.com collectively plan capital spending of $725 billion this year, much of it on artificial-intelligence chips. That bodes well for the makers of those chips, particularly the largest contract manufacturer, Taiwan Semiconductor Manufacturing Co.
The spotlight for chip investors has largely been elsewhere lately. Markets have recently blessed memory-chip manufacturers whose sales and prices have skyrocketed. Intel and Advanced Micro Devices are also celebrating a shift within AI toward using autonomous agents where their central processors are increasingly important.
There is an argument, though, that nobody in the chip world is better positioned to reap the rewards of this new phase than TSMC. And despite all that, its stock doesn't look expensive.
While the company doesn't make memory chips, it is the go-to manufacturer for just about everything else -- including Nvidia's market-leading AI chips and Apple's smartphone chips. It has already seen sales and profits soar over the past few years.
The strength of TSMC's position is evident in the recent expansion of its gross margins. Those margins get fatter when sales grow faster than expenses, something that happens for TSMC when its factories are running closer to full blast.
High capacity utilization offsets the large fixed costs of maintaining chip factories. With demand soaring, the company's gross margins climbed to around 66% in the first quarter, from roughly 59% a year before.
TSMC Chief Financial Officer Wendell Huang told analysts last month that those margins will actually compress in the latter part of the year -- but for good reason. The company is moving to high-volume production of its newest generation of cutting-edge chips, which it calls N2. Costs naturally go up during such ramp-up phases, then come down when production stabilizes.
Also pressuring TSMC's margins is an expansion of factories in the U.S., where the cost of operating chip factories is higher than in Taiwan. But that is another good reason for TSMC to spend. The geographical diversification hedges against political tensions with China and brings it closer to U.S. customers like Apple and Nvidia that want more domestic suppliers.
In the longer run, margins are likely to improve again as its cutting-edge chip making matures. They could also be helped by an unusual but financially prudent decision to grow production of slightly less-than-cutting-edge chips. TSMC's expansion of its so-called N3 chips in Taiwan, Japan and the U.S. will help it cater to AI chip demand but use older manufacturing equipment that costs less to deploy.
Another potential worry for TSMC is how much money is also going out the door on capital spending. The company said last month that capital expenditures would be near the top of a $52 billion to $56 billion range it earlier forecast for this year.
Growing capacity too fast in the chip business can cause whiplash later: When demand wanes, manufacturers are stuck with unused factory space that costs money to maintain.
But TSMC is hardly overextending itself. Chief Executive C.C. Wei said last month that he had "strong confidence" that revenue would grow more than 30% this year, a faster rate than its capital spending.
Indeed, that kind of revenue growth is all but certain. So strong has the demand been for TSMC's factories that some customers are committing to purchases long in advance, and even paying billions of dollars ahead of time to ensure they can get their hands on chips.
Nvidia, for instance, had purchase commitments of more than $95 billion as of its latest fiscal quarter in January, a significant portion of which reflects what it plans to pay TSMC. Those commitments were just $16 billion two years ago.
Adding to those advantages, TSMC has little genuine competition. There are formidable competitors in older-generation chips, but the company dominates in making the most advanced chips most coveted by the AI boom's biggest spenders. Samsung has a contract chip-making arm that is a distant second to TSMC in terms of revenue, while Intel and Japanese company Rapidus are trying to gain a foothold in the market. Elon Musk's recently announced Terafab project aims to make advanced chips, too, with Intel's help, but that possibility is far off at best.
High demand and a relative lack of competition should allow TSMC to charge higher prices. And prices will surely rise as its customers move to more advanced chips, helping boost revenue in the years ahead. But executives are careful to point out that they aren't going to bite the hand that feeds them. "We don't change our pricing dramatically," Wei said last month. "We just try to make sure that our customers can be successful in their market."
Perhaps surprisingly given its many advantages, TSMC's stock is attractively valued, with its price at around 21 times forward earnings. That is below the 26-times average for the PHLX Semiconductor Sector index and well below some of chip-making's buzzier names, including Intel and AMD.
TSMC and the chip industry aren't immune to cycles, even if the current uptrend has been unusually strong. But TSMC's trajectory suggests a lot of reward ahead with relatively little risk for a company at the heart of the AI boom.
Write to Asa Fitch at asa.fitch@wsj.com
(END) Dow Jones Newswires
May 11, 2026 05:30 ET (09:30 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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