Artificial intelligence (AI) stocks are enjoying another strong performance in 2025, and many are off to a strong start in 2026. Semiconductor stocks have been particularly strong, e.g. NVIDIA (NASDAQ: NVDA) and Broadcom (NASDAQ:AVGO) Push the group higher.
But one semiconductor stock that’s outperforming these two giants is TSMC (NYSE:TSM). As of this writing, TSMC shares are up 72% since the start of 2025, and are building on impressive fourth-quarter results in January. Management’s outlook for 2026 and beyond makes the stock look more attractive today than it did a year ago.
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TSMC is the world’s largest semiconductor contract manufacturer by a wide margin. By 2025, this margin expands further, with TSMC’s market share reaching 72%, as chipmakers such as Nvidia and Broadcom spend heavily to acquire their advanced manufacturing capabilities. Nvidia CEO Jen-Hsun Huang said that TSMC is the best semiconductor manufacturer in the world and “its advantages are incredible.”
In fact, TSMC’s technology leadership will be difficult to catch up with. Only two other manufacturers come close, and TSMC benefits from a virtuous cycle. Its technology has attracted big customers like Nvidia and Broadcom, giving it the ability to invest in additional production capacity and research and development. In turn, it attracts larger contracts and has the ability to fulfill those contracts, resulting in more revenue.
Strong demand for AI chips using state-of-the-art manufacturing processes has allowed it to increase spending while raising prices. Earlier this year, the company raised prices on a group of chips that account for about three-quarters of its revenue. The company plans annual price increases for these chips through 2029. At the same time, the company is pricing its next-generation process at a premium due to strong demand.
Management is investing heavily to meet this demand. Capital spending in 2026 is expected to be between $52 billion and $56 billion, with a median increase of 32%. Management expects this to result in depreciation charges accelerating starting this year, but revenue to grow faster.
In fact, management raised its five-year compound annual growth rate forecast starting in 2024 to 25% from 20%. After achieving 36% growth in 2025, this means annual growth will continue to be around 22.4% by the end of the decade. And with strong pricing power, it should be able to maintain high gross margins and improve operating margins. As a result, revenue should grow faster.
Although the stock trades at less than 24 times forward earnings, it still looks attractive. That’s especially true when you compare that to the P/E ratios of Broadcom and Nvidia, which trade at 41 and 32 times, respectively. Therefore, even with strong performance in 2025, investors should not expect TSMC to slow down significantly in 2026. If anything, the stock has plenty of room to run.
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Adam Levy works at TSMC. The Motley Fool owns and recommends Nvidia and TSMC. “Motley Fool” recommends Broadcom. The Motley Fool has a disclosure policy.
The artificial intelligence (AI) giant is up 72% since the start of 2025 and looks even more attractive in 2026 (hint: not Nvidia) Originally published by The Motley Fool