If You Only Own the Vanguard S&P 500 ETF, You're Missing Out on This Incredible Artificial Intelligence (AI) Semiconductor Stock
It’s not too late to add this foundational AI leader to your portfolio.
One of the most popular ways to invest in stocks is to buy a broad-based index fund like the Vanguard S&P 500 ETF (VOO 0.44%). It’s a great way to make sure you invest across a wide number of companies and never miss out on big trends that have the power to drive stock market gains for years to come.
The biggest trend driving the S&P 500 (^GSPC 0.38%) higher right now is artificial intelligence (AI). And the index is full of great companies that are seeing their stock prices skyrocket as investors pile into these big tech names like Nvidia, Alphabet, or Meta Platforms. If you own the Vanguard S&P 500 ETF, you own a good chunk of each of those names in your portfolio.
But if the Vanguard ETF is all you own, you’re missing out on an incredible AI semiconductor stock that isn’t in the S&P 500. Due to the criteria for inclusion in the index, investors who focus strictly on indexing probably don’t have any exposure to Taiwan Semiconductor Manufacturing (TSM 0.01%). The good news is, it’s not too late to add shares to your portfolio.
Image source: Getty Images.
The most important chip manufacturer in the world
Taiwan Semiconductor Manufacturing Company, or TSMC, is the largest chip foundry in the world. It commands over 60% of global spending on chip manufacturing.
And there’s good reason for that. TSMC’s capable of producing the most advanced chip designs in the world. So when a company like Nvidia, Alphabet, or Meta has a design for a new AI chip, they ask TSMC to actually make it for them.
Nvidia CEO Jensen Huang said TSMC is “the world’s best … not by a small margin, it’s the world’s best by an incredible margin.” While he said his company could use another fab to make its chip designs, he explained they’d get lower performance at a higher cost.
TSMC has a wide variety of big customers. Both Meta and Google use TSMC to manufacture their AI accelerator chips, which power their data centers for large language model training. Apple notably trained its Apple Intelligence model using Google’s TPU chips, which are manufactured by TSMC. Not to mention, Apple is one of the foundry’s largest customers, using TSMC chips across its entire lineup of devices.
TSMC’s massive market share creates a virtuous cycle. Since it receives so much more business from chip designers, it ends up with a lot more revenue that it can reinvest in research and development. That enables it to maintain a solid technology lead, ensuring its processes stay one step ahead of its closest competitors. That, in turn, wins it more business in the future from companies like Nvidia looking to build the most advanced chips.
With the sudden jump in demand for cutting-edge AI chips, TSMC is in an extremely strong position. Its scale makes it uniquely capable of meeting the growing demand. That showed up in its third-quarter earnings results. Revenue soared 39%, and earnings grew 54% year over year.
Importantly, management is planning to spend more to keep up with high-demand growth expectations for next year. Management said it expects capital expenditures in 2025 to climb higher as it builds out more capacity and starts commercial production out of its Arizona facility. That suggests another strong year ahead for TSMC.
One of the best values in artificial intelligence
While index investors missed out on TSMC’s market-beating 90% return in 2024, as of this writing, it’s not too late to buy the stock.
Shares currently trade for less than 24 times analysts’ consensus expectations for 2025 earnings. That’s only slightly higher than the S&P 500’s valuation and well below the valuation of other big AI stocks like Nvidia. Importantly, TSMC is expected to produce earnings growth exceeding 20% over the next five years, which makes that price multiple an absolute bargain relative to its growth potential.
With its $1 trillion valuation, as of this writing, it would have significant weighting in the S&P 500 if it were included. Index investors looking to maintain a market-cap weighted exposure to TSMC while adding it to their portfolio should consider buying an amount worth about 1.7% of the amount they hold in the Vanguard S&P 500 ETF.
Even if you aren’t an index investor, you may want to take a closer look at TSMC. It could be a great addition to any portfolio.
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Adam Levy has positions in Alphabet, Apple, Meta Platforms, and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Alphabet, Apple, Meta Platforms, Nvidia, Taiwan Semiconductor Manufacturing, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.