Artificial intelligence (AI) stocks led stock market gains in the early days of the AI boom as companies and investors envisioned how this hot technology could transform the world. Businesses may use AI in many ways, allowing them to gain efficiency and become more innovative faster. But to do all of this, AI models must “learn” quite a bit in a process called training — for this to happen, they need chips.

Enter Taiwan Semiconductor Manufacturing (TSM +1.97%). The company is the world’s biggest foundry, with 72% market share, and has been producing the chips leading this technological transformation. Now, when you first think of AI chips, you probably think of Nvidia — the company is the biggest AI chip player. But Nvidia and most other well-known chip companies design their chips, then rush to TSMC to manufacture them.

So TSMC benefits from demand for all AI chips — not just those from one designer. This has resulted in quarter after quarter of growth for the company. And something happening at Amazon, Meta Platforms, and now potentially Anthropic represents more fantastic news for TSMC. Let’s check it out.

TSMC’s challenges

First, it’s worth mentioning a bit more about TSMC’s recent path. We’ll start with a few of the challenges. Since the company actually produces these powerful chips, it uses a variety of materials — like helium and hydrogen, for example — so risks include shifts in prices or shortages and geopolitical events that may hamper the transport of goods. (The company recently said that, considering the current conflict in Iran, it doesn’t expect an impact on supply so far.)

The supply of other components, such as memory, may also impact a chip’s path from the order book to delivery. Shortages of any elements involved in the process are possible due to the high level of demand from customers such as Nvidia and other chip designers.

And this demand also means TSMC must focus on expansion — the company expects some margin dilution over the coming years due to the ramp up of facilities — but it’s compensating somewhat through productivity gains and cost control. And it’s managed to increase return on invested capital over time, showing its investments are paying off.

TSM Return on Invested Capital data by YCharts

Meanwhile, earnings have been climbing, reaching record levels for a fourth straight quarter recently. Revenue advanced 35%, and earnings per share jumped 58% in the quarter, driven by demand for powerful AI chips.

Taiwan Semiconductor Manufacturing

Today’s Change

(1.97%) $7.16

Current Price

$370.51

An exciting trend for TSMC

And this brings me to the happening that represents fantastic news for this foundry giant. Amazon and Meta Platforms already have been doing this particular thing, but this trend may be in its early stages: These players are designing their own chips. And now AI lab Anthropic — maker of the popular AI model Claude — might be considering the same thing. Anthropic is examining the possibility, Reuters reported this month. TSMC manufactures the Amazon and Meta chips, and we could imagine that if Anthropic launches a chip, it will likely turn to TSMC too.

Amazon may be on track to significantly scale up its in-house chips as they are proving to lower costs for the company and its customers. At scale, Amazon’s Trainium chip would “save us tens of billions of capex dollars per year,” chief Andy Jassy wrote in a letter to shareholders recently.

All of this represents additional business for TSMC, and as a result, revenue growth. Of course, the pace of growth will depend on TSMC’s ability to produce all of these chips — the company will have to manage the challenges I mentioned earlier. That said, these potential customers don’t have a wide range of foundry choices, and building out one’s own manufacturing capabilities wouldn’t be feasible — chip manufacturing requires an enormous investment in technology, access to specific talent, and years to put everything in place.

In any case, the idea that more and more companies are designing their own chips is fantastic news for TSMC — and it’s very likely that this top foundry player will reap the rewards over time.