Dutch semiconductor equipment manufacturer ASML (ASML -8.55%) warned investors Wednesday its sales might not grow at all in 2026, sparking worries the artificial intelligence (AI) revolution might not be as inevitable as investors thought — and sparking a brief sell-off in shares of contract chip manufacturer Taiwan Semiconductor Manufacturing (TSM 0.23%).

Shares of TSMC tumbled more than 4% in early trading before making up most of their losses by noon ET. As of 12:10 p.m. ET, TSMC stock is down only 0.2%.

Semiconductor logic

Why is it down at all? The reasoning goes like this: The AI revolution is supposed to be great news for semiconductor stocks — for both sellers of chips like TSMC, and sellers of the machines that make the chips, like ASML. But if ASML’s sales are slowing (and they are — Q2 sales were up only 0.6% year over year), then that logically might mean that TSMC’s own sales growth could stall as well.

That’s the worry that fretted investors this morning.

Is TSMC stock a sell?

And yet, that’s not what most analysts think will happen — at all. According to analysts polled by S&P Global Market Intelligence, total sales growth for TSMC over the next five years should average nearly 20% annually. And between the stock’s 22.4-times earnings valuation and its 1.8% dividend yield, that means TSMC is almost perfectly priced for the long-term growth that almost everyone is certain will happen.

Granted, short term hiccups could arise. In ASML’s case, growth is probably slowing, at least in part because of sanctions placed on exports of chip-making machinery to China. But there are plenty of other countries in the world that need chips, and both ASML and TSMC can still sell to them.

Long term, I expect TSMC stock is going to do just fine.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.

Shares of Taiwan Semiconductor Manufacturing Company (TSM 3.20%) jumped 3% through 2:35 p.m. ET after CEO C.C. Wei told shareholders at the company’s annual general meeting that TSMC expects to earn “record profit” in 2025.

Of particular interest to investors, Wei said he’s “not afraid” that President Donald Trump’s tariffs turmoil will keep TSMC from reaching this goal.

TSMC and tariffs

“The impact of tariffs on TSMC is not direct,” Wei said. “Tariffs are paid by importers. However, tariffs will make prices higher and could drag down demand.” Regardless, “overall AI demand is still very high” — indeed, higher than the production capacity to fulfill it. Thus, if U.S. buyers pull back on buying semiconductors manufactured in Taiwan, well, there are always other buyers elsewhere.

Long story short, Wei is confident his company can continue growing sales in the mid-20% range despite tariffs threats. Because even if supply eventually meets demand for artificial intelligence applications, new markets are forming to create even more demand for the company’s chips.

Which markets? “The chip demand for humanoid robots starts now,” declared Wei.

Is TSMC stock a buy?

So demand for TSMC’s chips shouldn’t be an issue. But should you demand to buy some TSMC stock?

Maybe.

On the one hand, a mid-20s growth rate compares favorably against a TSMC P/E ratio of only 24, suggesting TSMC stock is cheap. On the other hand, TSMC’s free cash flow isn’t quite as robust as its reported generally accepted accounting principles (GAAP) earnings suggest. The company reported $39.4 billion profit over the past year, but FCF was only $27.3 billion, meaning TSMC generated cash profit of only about $0.69 for each $1 in claimed profit.

With a price-to-free-cash-flow ratio of more than 31, TSMC still seems pricey to me.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.