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Behind the jaw-dropping technologies that Nvidia, Apple, Broadcom, and many others put out is Taiwan Semiconductor Manufacturing (TSM 1.73%). TSMC -- as it's commonly called -- is the world's largest chip foundry and only makes chips on a contract basis, which allows it to stay neutral as competitors battle it out in the smartphone, GPU, and automotive worlds.

While its chips have always been cutting-edge, TSMC's latest technology had yet to hit the markets until recently. Its 3 nanometer (nm) chips are finally starting to contribute to revenue, making this an exciting time for TSMC investors. So, what's the big deal with these chips? Read on to find out.

Taiwan Semiconductor's 3 nm chips represent the next iteration in chip technology. By increasing the density, Taiwan Semiconductor can pack more transistors onto a single chip, making them more powerful or energy efficient (depending on how the designer configures the chip).

This allows for more powerful technologies to be launched by the likes of Nvidia or Apple. With the latest wave of artificial intelligence interest hitting various companies, the 3 nm chip launch couldn't have come at a better time.

While the legacy 5 nm chip still holds the lion's share of revenue, investors should expect 3 nm's revenue share to grow rapidly over the next few quarters.

Data source: Taiwan Semiconductor.

Conversely, the 7 nm revenue share has declined as 5 nm revenue has increased. Eventually, 3 nm will do the same to 5 nm chips, but that won't be for a few years. Regardless, now that 3 nm chips are starting to impact Taiwan Semiconductor's financial results materially, it's an exciting time for investors as they can finally see returns on the capital TSMC has invested into developing the process.

Despite the great news of the 3 nm chips' arrival, Taiwan Semiconductor still posted declining revenue in the third quarter. Because customers have excess inventory, demand for TSMC's chips has been lower in 2023. This contributed to revenue declining by 15% year over year in U.S. dollars. But management also sees signs of PC and smartphone demand returning, indicating that 2024 could be a great year for the company.

With a stronger outlook ahead, you'd think investors would get excited and pump the stock up, but that's not happening. Taiwan Semiconducutor's valuation is cheap from both a trailing- and a forward-earnings perspective.

TSM PE Ratio data by YCharts

With the stock trading at 15 times trailing and 18 times forward earnings, it's much cheaper than the S&P 500's 25 times trailing and 19 times forward earnings. This is despite the fact that Taiwan Semiconductor is one of the best-run businesses and is looking at huge future demand.

Taiwan Semiconductor is your investment if you're looking for a stock that can display growth characteristics while trading like a value stock. These two investing fields rarely intersect, but the results can be fantastic when they do.

The company is just starting to roll out its innovative 3 nm chip technology, which ultimately costs more than its predecessors. This incremental increase should drive its stock price higher, and investors ought to buy the stock now with at least a three- to five-year holding period in mind to capitalize on this transition.

Keithen Drury has positions in Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Apple, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.

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