The Leading AI Chip Stock to Accumulate Amid Market Pullback

Key Points

• AI chip stocks have declined this month as concerns grow that custom silicon could dilute the pricing power of market leaders.

• Taiwan Semiconductor reported a 77% year‑over‑year increase in second‑quarter net income, with its gross margin expanding for a fourth consecutive quarter.

• Management lifted its 2026 revenue growth outlook to slightly above 40%.

The AI chip sector has experienced a pullback this month. Micron Technology has fallen roughly 32% over the past three weeks, while Broadcom is about 24% below its 52‑week peak. Even Nvidia (NASDAQ: NVDA), which has outperformed many peers, is down about 12% from its recent high.

The concern is not a lack of demand but rather the competition for market share. Notably, the Chinese AI laboratory DeepSeek is reportedly building its own AI chip to lessen dependence on Nvidia, as reported by Reuters on July 7. OpenAI has also introduced a custom inference chip developed with Broadcom, and major cloud providers continue to expand their own silicon initiatives.

A record quarter the market shrugged at

Taiwan Semiconductor Manufacturing reported its second‑quarter results on Thursday, which exceeded expectations. Revenue increased 33.7% year‑over‑year to $40.2 billion, while net income surged 77.4% to a new record. Gross margin rose to 67.7%, marking the fourth consecutive quarter of expansion and up from 59.5% in the third quarter of 2025.

The upward trajectory is as important as the absolute figures. TSMC’s year‑over‑year net‑income growth has accelerated from 35% in Q4 2025 to 58.3% in Q1 2026 and now 77.4%. Management expects this momentum to persist, projecting third‑quarter revenue of $44.6 billion to $45.8 billion, representing approximately 37% year‑over‑year growth at the midpoint. During the earnings call, the company also lifted its full‑year 2026 revenue growth outlook to slightly above 40%, up from its prior estimate of more than 30%.

This growth is driven by TSMC’s dominance in leading‑edge manufacturing. Chips fabricated on 7‑nanometer and smaller nodes accounted for 77% of wafer revenue in the quarter, and the next wave of technology is already emerging.

Moving into the third quarter of 2026, we anticipate sustained demand for our leading‑edge process technologies, including a significant ramp‑up of our 2‑nanometer offerings,” said CFO Wendell Huang in the second‑quarter earnings release.

Why Not Nvidia?

For clarity, I admire Nvidia’s business model. However, this sell‑off specifically targets the very advantage that fuels its stock price: pricing power. Should DeepSeek, OpenAI, and the major cloud providers succeed in designing alternatives to Nvidia’s GPUs, Nvidia’s growth trajectory could decelerate.

TSMC does not face that limitation. Custom chips still require manufacturing, and the leading‑edge capacity to produce them is overwhelmingly concentrated at TSMC.

In 2025, the company fabricated 12,682 products for 534 customers. Investing in TSMC is a bet on the overall demand for AI computing rather than on any single design winning.

What about the lower‑priced, more heavily pressured names? Micron trades at roughly six times forward earnings following its decline, yet memory is a highly cyclical sector, making a purchase at current levels a bet that today’s robust memory pricing persists.

Broadcom, a genuine leader in custom AI chips, presents a closer decision. nevertheless, even after a 24% decline, it trades at about 21 times forward earnings, with its custom‑chip momentum already reflected in the valuation.

Conversely, Taiwan Semiconductor Manufacturing trades at about 30 times trailing earnings at its current price of approximately $410, which is roughly in line with Nvidia’s valuation, for a business whose profit growth is accelerating and whose margins continue to expand.

Of course, there are reasons the market hesitated on Thursday. In addition to the record results, management increased its 2026 capital‑expenditure plan to $60 billion–$64 billion, at least $4 billion above the prior forecast, and pledged an additional $100 billion investment in Arizona. Such capital intensity could exert pressure on margins over time.

The larger risks are legacy concerns. Much of the company’s production remains in Taiwan, exposing it to geopolitical uncertainties inherent to the region. Moreover, the semiconductor industry has historically been cyclical.

Still, at this valuation, investors appear to be acquiring a company that manufactures nearly every leading‑edge AI chip, trading at a multiple comparable to Nvidia’s, without having to speculate on which designs will prevail.

That said, I would size the position while keeping geopolitical risk in mind.

Image source: TSMC.

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