It's not too late to add this basic AI reader to your portfolio.
One of the most popular ways to invest in stocks is to Vanguard S&P 500 ETF (VOO 0.44%). This is a great way to ensure you invest in a large number of companies and don't miss out on big trends that have the power to drive stock market gains for years to come.
The biggest trends driving S&P500 (^GSPC 0.38%) Artificial intelligence (AI) is currently at the top of the list. And this index includes a lot of great companies whose stock prices are soaring as investors flock to these big tech companies. Nvidia, alphabetor meta platform. If you own the Vanguard S&P 500 ETF, you own a significant portion of these stocks in your portfolio.
But if you only own the Vanguard ETF, you're missing out on some great AI semiconductor stocks that aren't included in the S&P 500. Because of the criteria for inclusion in an index, investors who are strictly focused on the index probably won't. there is some kind of exposure taiwan semiconductor manufacturing (TSM 0.01%). The good news is that it's never too late to add stocks to your portfolio.
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The world's most important chip manufacturer
Taiwan Semiconductor Manufacturing Company (TSMC) is the world's largest chip foundry. It accounts for more than 60% of global chip manufacturing spending.
There's a good reason for that. TSMC can produce the most advanced chip designs in the world. So when companies like Nvidia, Alphabet, and Meta design new AI chips, they ask TSMC to actually manufacture them.
Nvidia CEO Jensen Huang said TSMC is “the best in the world…not by a small margin, but by an incredible margin.” He said the company could use a separate factory to manufacture its chip designs, but explained that higher costs would result in lower performance.
TSMC has a variety of large customers. Meta and Google both use TSMC to manufacture AI accelerator chips and power their data centers for training large language models. apple Specifically, we trained an Apple Intelligence model using Google's TPU chips manufactured by TSMC. Not to mention, Apple is one of the foundry's biggest customers and uses TSMC chips in its entire lineup of devices.
TSMC's huge market share creates a virtuous cycle. They receive more business from chip designers, which ultimately means more revenue that can be reinvested in research and development. This allows the company to maintain a solid technological lead and ensures that its processes are one step ahead of its closest competitors. As a result, it could win more business in the future from companies like Nvidia that are looking to develop cutting-edge chips.
Demand for cutting-edge AI chips is surging, and TSMC is in a great position. Our scale gives us the unique ability to meet growing demand. This was reflected in the third quarter results. Sales were up 39% year over year, and profits were up 54%.
Importantly, management plans to spend more to meet next year's demanding growth expectations. Management said it expects capital expenditures to increase further in 2025 as it builds more capacity and begins commercial production at its Arizona facility. This suggests another strong year for TSMC.
One of the best values in artificial intelligence
Index investors missed out on TSMC's market-beating 90% return in 2024, but as of this writing, it's not too late to buy the stock.
The stock currently trades at less than 24 times analysts' consensus 2025 earnings estimates. This is only slightly higher than the S&P 500's valuation, but well below the valuation of other major AI stocks such as Nvidia. Importantly, TSMC is expected to deliver over 20% earnings growth over the next five years, making its price multiple an absolute bargain compared to its growth potential.
At the time of writing, the company's valuation is $1 trillion, and if it is included in the S&P 500, it will have a large weight in the S&P 500. Index investors looking to maintain cap-weighted exposure while adding TSMC to their portfolio should consider purchasing an amount equivalent to approximately 1.7% of their holdings in the Vanguard S&P 500 ETF.
Even if you're not an index investor, you might want to take a closer look at TSMC. It can be a great addition to any portfolio.
Randi Zuckerberg is a former head of market development and spokesperson at Facebook, sister of Meta Platforms CEO Mark Zuckerberg, and a member of the Motley Fool's board of directors. Alphabet executive Suzanne Frye is a member of The Motley Fool's board of directors. Adam Levy has worked at 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 ETFs. The Motley Fool has a disclosure policy.
