The market sell-off focusing on technology stocks has hit several of my top stocks fairly hard. However, I don’t think that this is the time to panic; instead, investors should look at this sell-off as a buying opportunity.
I’m focusing on two hard-hit stocks: Taiwan Semiconductor Manufacturing (TSM -3.15%) and ASML (ASML -1.25%). Both of these are vital in the chip production world, and each looks like it’s a great stock to scoop up while it’s on sale.
Taiwan Semiconductor is expanding due to increased demand
If you think of all the long-term trends occurring in the market right now, there is one that overarches them all: chips. Anything with more advanced technology requires high-powered chips, and without TSMC or ASML, these advances wouldn’t be possible. While short-term worries come and go in the stock market, investors should focus on long-term trends like chip technology advances. But when short-term opportunities arrive, investors need to pounce to create the best returns.
Taiwan Semiconductor is the top contract chip manufacturer, as it produces chips designed by other companies. Its client list includes the who’s-who of the technology world, with companies like Apple and Nvidia partnering with Taiwan Semi to produce their custom-designed chips. Because neither of these two companies (and many other tech companies) has a chip foundry to produce their own chips, they farm out the work to TSMC, which allows Taiwan Semi to sell to companies that are competing with each other.
This neutral position that Taiwan Semiconductor finds itself in is enviable, and it also gives management fantastic insights into where chip demand is going. They see huge growth from AI-related chips, which are expected to expand revenue at a 45% compound annual growth rate (CAGR) over the next five years. Companywide, revenue is expected to rise at a nearly 20% CAGR, which is incredible growth for a company of TSMC’s size.
This growth requires expansion, which is why Taiwan Semiconductor recently announced a $100 billion investment in building U.S. chip production facilities on top of the $65 billion it had already spent. Demand for U.S.-produced chips is off the charts, and TSMC has already sold out production capability through late 2027, so an expansion was needed. This will boost ASML, which is a key supplier for TSMC.
ASML is a key beneficiary of this expansion
ASML makes extreme ultraviolet (EUV) lithography machines. While that term may be completely foreign to you, the technology behind the machines allows chip manufacturers to lay microscopic electrical traces on a chip. ASML is the only company in the world with this technology, making it a technological monopoly by default.
With companies like TSMC announcing increasing production facilities to meet chip demand, ASML will be a huge beneficiary, as more chip production indicates more ASML machines being purchased.
Furthermore, ASML’s monopoly status is highly protected through decades of research and billions of dollars in R&D expenses. This makes ASML a fairly safe stock to buy, hold, and forget about, as its machines are some of the most important, considering the direction that we’re heading in.
Both Taiwan Semiconductor and ASML have great investment theses behind them, but why are they solid buys now?
Both stocks are the cheapest they have been in some time
At the time of writing, Taiwan Semiconductor is down around 21% from its all-time high, and ASML is down over 30%. This sell-off is mostly centered around fears of President Trump’s tariffs, but in all reality, these tariffs and worries over them likely have no bearing on which direction these companies are heading over the next five years. As a result, I’m viewing this weakness as a buying opportunity.
TSM PE Ratio (Forward) data by YCharts
It has been a while since both companies traded this cheaply on a forward price-to-earnings (P/E) basis, which indicates that now could be a great time to acquire them. Both of these companies make excellent stocks to buy and forget about in your portfolio, as the long-term trends in the chip market are heavily in their favor.
Keithen Drury has positions in ASML, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends ASML, Apple, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
