Artificial Intelligence (AI) is causing a paradigm shift in today’s modern technological world. AI technologies are making their presence felt in all walks of life – be it education, business, investing or home management. Not surprisingly, artificial intelligence has also become a major investment trend in the stock market, attracting the interest of both amateur and seasoned investors.
However, it is essential to understand that not all AI-powered businesses are equal. Only a few of these companies are positioned to significantly benefit from the ongoing AI rush. Taiwanese semiconductor manufacturing (NYSE: TSM)also known as TSMC, appears strategically positioned to seize this opportunity as it plays a key role in building the hardware infrastructure needed to run complex AI workloads.
Here’s why TSMC could be a smart long-term choice.
AI catalyst
As the largest contract chip manufacturer in the world, TSMC is known for manufacturing chips for several fabless chip designers and major consumer electronics companies, including Nvidia, Advanced micro devicesAnd Apple.
Not surprisingly, TSMC has become a major beneficiary of hyperscalers moving from traditional servers to AI servers. Thanks to its advanced semiconductor process technologies, the company plays a critical role in manufacturing the advanced semiconductor content used in these AI servers, such as GPUs, AI accelerators and network processors. By one estimate, TSMC currently produces nearly 90% of the world’s advanced AI processors.
While most existing AI accelerators (specialized high-performance computing machines for AI workloads) are manufactured with 5-nanometer or 4-nanometer technology, many customers are now choosing TSMC’s advanced 3-nanometer process technology. Because 3-nanometer chips can outperform previous-generation chips in terms of processing power and energy consumption, they are better suited for power-hungry AI data centers. TSMC expects 3-nanometer chip sales to more than triple year-over-year by 2024. The company is also gearing up for volume production of 2-nanometer chips by 2025. Management also expects 2-nanometer chips to be greater revenue contributors to the company than 3-nanometer or 5-nanometer chips in the first two years after launch.
TSMC expects AI processors to make the largest contribution to overall revenue growth in the coming years. The company expects the revenue contribution from AI processors to grow annually at a compound annual growth rate (CAGR) of 50% over the next five years, accounting for more than 20% of the company’s revenue by 2028.
High-performance computer company
The surge in AI-related hardware demand has made its high-performance computing (HPC) business the largest revenue contributor for TSMC.
In the first quarter of 2024, HPC accounted for 46% of the company’s total revenue. HPC-related demand partially offset the negative impact of smartphone industry seasonality in the first quarter. The HPC activities are also expected to support TSMC in the long term.
Impressive financial figures
TSMC has impressive financial figures, despite the headwinds in the smartphone sector. The company expects sales to grow in the low-to-mid 20s percent range in U.S. dollar terms through 2024. At the end of the first quarter, TSMC had 1.9 trillion New Taiwan Dollars in cash and marketable securities and reported 255 billion New Taiwan Dollars. New Taiwan dollars in free cash flow.
Expansion of the geographic footprint
Although TSMC accounts for nearly 61.2% of the global semiconductor foundry market, much of this business is concentrated in Taiwan.
To reduce geographic concentration risk, TSMC plans to build three facilities (“fabs”) in Arizona. TSMC expects volume production of 4-nanometer chips at its first plant in Arizona to occur in the first half of 2025. The company has planned volume production of 2-nanometer and 3-nanometer chips at its second plant in Arizona by 2028. Finally, the company plans to start producing chips based on 2-nanometer or advanced technologies in the third plant in Arizona. The U.S. government is also helping TSMC in this effort by offering the company $11.6 billion in grants and loans.
TSMC has also planned dedicated technology factories in Japan and Germany to further expand its geographic footprint.
Reasonable rating
TSMC is currently trading at a price-to-earnings (P/E) ratio of 29, lower than the semiconductor industry’s average price-to-earnings ratio of 32. While not exactly cheap, the valuation seems quite reasonable given that analysts expect sales to increase this year will grow. -on an annual basis by 24% in 2024 and by 20.4% in 2025.
These are impressive estimates considering weak end-market demand for smartphones (which accounted for 38% of the company’s revenue in the first quarter). Smartphone seasonality and the extension of smartphone replacement cycles are notable challenges for TSMC. However, the company is confident that strong demand for its chips in high-performance computing can partially offset the negative impact of the slowdown in the smartphone industry.
Therefore, TSMC now seems a smart choice for investors given the crucial role it plays in building the hardware infrastructure for AI systems, its technological superiority, and its reasonable valuation.
Should You Invest $1,000 in Semiconductor Manufacturing in Taiwan Now?
Consider the following before buying shares in Taiwan Semiconductor Manufacturing:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Taiwan Semiconductor Manufacturing wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.
Think about when Nvidia created this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $703,539!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates and two new stock picks per month. The Stock Advisor is on duty more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns May 28, 2024
Manali Pradhan has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Advanced Micro Devices, Apple, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
A Once-in-a-Generation Investment Opportunity: 1 Artificial Intelligence (AI) Growth Stock to Buy and Hold Now was originally published by The Motley Fool
