Stanley Druckenmiller’s Duquesne Family Office owns TSMC, and the stock ranks third in our list of the 10 best AI stocks according to Druckenmiller. Click here to see which two AI stocks rank ahead of it and the other seven picks on the list.
Taiwan Semiconductor Manufacturing Company (NYSE:TSM) is hard to replace because it makes the most advanced chips that AI companies need, and few rivals can match its scale. Many billionaires and hedge funds agree. Chips of 7nm and smaller already make up 77% of its wafer revenue. Customers keep coming back, so growth has been strong. Revenue grew 36% in the second quarter, and management guides to about 37% growth in the third quarter. The company has also kept more of each sales dollar as profit, with its profit margin rising from 42.65% to 55.62% in a year.
A New Chip Cycle Is Just Starting
A new product cycle is still ahead. Its newest 2nm chips made up only 3% of wafer revenue in the second quarter, so the ramp has barely started. TSMC has also beaten earnings estimates in each of the last four quarters, and analysts keep raising their forecasts. Even if AI spending slows, demand for advanced chips from phones, computers and cars gives the business a base. Hedge funds keep adding to it too. Insider Monkey’s database shows 249 hedge funds held TSMC at the end of the second quarter, up from 234 in the first. See which hedge funds and institutions own TSMC.
Bear Case: Margins and Spending
Profit margins are likely to fall before they recover. Management guides to a third-quarter gross margin of 65% to 67%, down from 67.7% in the second quarter. The 2nm ramp and the new factories overseas both cost more to run, and the margin pressure runs through the second half of 2026. See how much overseas factory cost TSMC’s valuation can absorb.
TSMC also needs to spend heavily to grow. It has big expansion plans in the US and is reportedly weighing more investment in Texas. If demand falls short of that new capacity, the factories run below full use, and because most of the costs are fixed, margins fall further. Not every investor worries about the bill. Jim Cramer told a caller on Mad Money on October 1 to buy TSMC, and he called it a great company. Read what else Cramer said about the stock.
Valuation
Taiwan Semiconductor Manufacturing Company trades at a forward P/E of 27.9, against about 19 for the S&P 500 and 23.5 for its sector. That is a premium, and the growth pays for it. Analysts expect earnings per share to rise 59% in 2026 and 29% in 2027, while the market’s earnings grow about 10% a year. The PEG ratio, which compares the P/E to growth, is 0.77 against a sector median of 1.30. TSM costs less per point of growth than the typical stock in its sector. On 2027 earnings of $21.93, its P/E is about 22, which is close to its own five-year average of 21.8.
Weighing TSMC against ASML? Read our comparison of the two chip stocks.
While we acknowledge the risk and potential of TSM as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than TSM and that has 10,000% upside potential, check out our report about this cheapest AI stock.
READ NEXT: 33 Stocks That Should Double in 3 Years and Cathie Wood 2026 Portfolio: 10 Best Stocks to Buy
Follow Insider Monkey on Google News.
