Taiwan Semiconductor Manufacturing Dominates the AI Chip Market: Can It Sustain Its Trillion-Dollar Valuation?

The Undisputed Leader in Advanced Chip Manufacturing

When you use ChatGPT, Gemini, or any other generative AI application, you’re benefiting from sophisticated hardware running in the background. The chips powering these AI models come from one place: Taiwan Semiconductor Manufacturing (NYSE: TSM) (TSMC). The company has established an almost unshakeable monopoly in advanced chip production, commanding over 90% market share in cutting-edge AI processors—a competitive position that’s virtually impossible to challenge.

With its stock rallying roughly 54% last year, TSMC now boasts a market cap exceeding $1.7 trillion, placing it among the world’s most valuable companies. Yet the critical question remains: does such a valuation still offer attractive entry points for investors, or has the stock price already priced in all the upside?

The Seismic Shift in Revenue Streams

TSMC operates under a foundry model, manufacturing chips designed by other technology companies rather than selling directly to consumers. This business structure has historically been dominated by smartphone demand, with major clients relying on TSMC for processing power in their mobile devices. However, the landscape has undergone a dramatic transformation.

High-performance computing (HPC)—the backbone of AI infrastructure—has supplanted smartphones as TSMC’s primary revenue engine. The numbers tell a compelling story:

HPC Revenue Growth:

• Q3 2025: $18.87 billion (57% of total revenue)
• Q3 2024: $11.99 billion (51% of total revenue)
• Q3 2023: $7.26 billion (42% of total revenue)
• Q3 2022: $7.89 billion (39% of total revenue)
• Q3 2021: $5.51 billion (37% of total revenue)

Smartphone Revenue Trajectory:

• Q3 2025: 30% of total revenue
• Q3 2024: 34% of total revenue
• Q3 2023: 39% of total revenue
• Q3 2022: 41% of total revenue
• Q3 2021: 44% of total revenue

The explosive growth in HPC revenue—surging from $7.26 billion in Q3 2023 to $18.87 billion just two years later—directly mirrors the accelerating investment in artificial intelligence infrastructure and data center expansion. Remarkably, TSMC’s HPC segment alone generated more revenue in Q3 2025 ($18.87 billion) than the company’s entire quarterly output in Q3 2021 ($14.88 billion).

Beyond the AI Hype: Building a Diversified Empire

While AI chips have dominated recent headlines and investor attention, TSMC’s relevance extends far beyond artificial intelligence. The company manufactures semiconductors embedded in virtually every modern technology—from smartphones and laptops to televisions, automobiles, and tablets. This diversification creates a powerful hedge against market cycles.

Even if AI demand moderates in the coming years—a probable scenario as the market matures—TSMC’s foundational role in the tech ecosystem ensures sustained revenue. Growth may decelerate, but the company’s indispensable position will likely persist.

Why TSMC Stands Apart From Competitors

The semiconductor manufacturing landscape includes other major players, yet TSMC operates in a tier of its own. Compared to rivals in the foundry space, TSMC produces higher volumes, deploys more advanced process technologies, and achieves superior yield rates (the percentage of functional chips from each production batch).

This technological and operational superiority has translated into market dominance:

• Overall foundry market: TSMC commands approximately 72% market share, with second-place competitors holding just 7%
• Advanced AI chip segment: TSMC’s market share exceeds 90%

This concentration reflects not just current performance but also the structural barriers competitors face in catching up. Building the infrastructure and expertise to match TSMC’s capabilities would require years and billions in capital investment.

A Long-Term Portfolio Anchor

Over the past five years, TSMC has delivered average annual returns near 22%—a performance that shouldn’t be extrapolated indefinitely, yet signals the company’s trajectory of sustained industry dominance. TSMC has become so intertwined with global technology infrastructure that its operational continuity is virtually assumed by the entire tech sector.

The company represents a rare combination of characteristics valuable in any long-term investment: an unassailable competitive moat, indispensable market position, and exposure to structural growth tailwinds. For investors seeking a foundational holding that aligns with technological advancement across multiple industries, TSMC embodies those principles.

The Investment Case: Valuation Perspective

The trillion-dollar valuation raises a natural question: Is TSMC fairly priced, or are expectations already baked into the stock price? The answer lies in recognizing that TSMC’s dominance isn’t a temporary advantage but rather a structural feature of the global semiconductor supply chain. Without TSMC, the entire tech ecosystem would face a significant quality and capability step backward.

This enduring competitive moat, combined with the company’s exposure to secular growth in computing demand, suggests the investment thesis remains compelling even at current valuation levels. The critical factor isn’t whether TSMC will grow, but rather whether its growth trajectory justifies the current market cap—a question that favors the affirmative for long-term investors.