Artificial intelligence (AI) has played a central role in the rise of semiconductor stocks in recent years, evidenced by the massive 131% spike in stock markets. PHLX semiconductor sector indexing during this period. The good part is that the proliferation of this technology will fuel stronger growth in this market as AI adoption moves from data centers to edge devices such as smartphones, personal computers (PCs), and automotive applications, among others.
For example, the market for chips used in smartphones is expected to rise from $104 billion in 2023 to $146 billion next year. By contrast, spending on PC semiconductors could rise from $89 billion last year to $107 billion in 2025, while spending on chips in the automotive market is expected to rise to $104 billion next year from $79 billion last year. Meanwhile, spending on semiconductors deployed in AI servers and data centers will increase from $78 billion in 2023 to $136 billion next year.
For investors looking to take advantage of all these fast-growing semiconductor end markets that have seen a big boost thanks to AI, Taiwanese semiconductor manufacturing (NYSE: TSM)Popularly known as TSMC, seems like an ideal bet.
The foundry giant serves all the industries covered, and the company’s latest news reinforces the fact that AI is proving to be a solid growth driver for the company. Let’s look at the reasons why.
TSMC is on track to deliver another great quarterly report
TSMC has just released its sales data for September and the company has reported an impressive year-over-year increase of almost 40% in its monthly revenue to 251.8 billion New Taiwan (NT) Dollars. Adding monthly revenues for July, August and September, TSMC’s third-quarter revenue would reach nearly NT$760 billion, an impressive 39% jump from the same period last year.
That number is higher than analysts’ third-quarter revenue estimates of NT$748 billion. So TSMC appears poised to exceed Wall Street expectations when it reports its third-quarter results on October 17. Analysts forecast the company’s earnings of $1.80 per share, up 40% from the same period last year, but the better-than-expected sales growth will likely translate into stronger profits.
Something else worth mentioning is that TSMC’s revenue increased 32% in the first nine months of 2024 compared to the same period last year. This means TSMC is on track to exceed the 26% revenue growth to $87.2 billion that analysts expect the company to achieve by 2024. More importantly, TSMC is expected to maintain healthy growth levels in the coming years.
However, don’t be surprised if TSMC’s revenue growth exceeds Wall Street expectations. That’s because the company is one of the premier pick-and-shovel plays in the vast AI space. It produces and manufactures chips for a range of fabulous chip makers, such as Nvidia, AMD, Qualcomm, BroadcomAnd Marvell technology.
Even better: chipmakers with their own factories, such as Intelare also turning to TSMC to take advantage of the latter’s advanced chip manufacturing processes to produce more efficient, more powerful chips. But that’s not where TSMC’s AI-related opportunities end. The company also produces chips for Appleallowing it to take full advantage of the growth in AI smartphone sales.
A closer look at the customers discussed will reveal that TSMC is one of the best ways to capitalize on the AI chip boom across industries. For example, Nvidia, AMD and Intel are trying to make optimal use of the possibilities offered by AI accelerators. Nvidia is currently chasing this market, making chips that use TSMC’s process nodes to deliver faster performance and lower power consumption than the competition.
Qualcomm, AMD and Intel are present in the AI-enabled PC market. Similarly, Qualcomm and Apple are showcasing capabilities that will allow TSMC to tap into the smartphone space. And finally, Marvell and Broadcom allow TSMC to tap into another fast-growing AI semiconductor niche in the form of custom AI chips. Simply put, it doesn’t matter which of these companies captures more market share and ultimately dominates their respective niches; TSMC will most likely be the eventual winner.
That is why TSMC’s advanced packaging technology, which is used for the production of AI chips, is sold out until 2025. As a result, the company is expanding its capacity to produce AI chips a year ahead of the original schedule, according to Morgan Stanley. Ideally, this should allow TSMC to make more chips, fill more orders and achieve stronger growth in sales and profits.
Buying the shares before October 17 is a no-brainer
This discussion makes it clear that TSMC has tremendous momentum as it releases its third-quarter earnings report, which is due on October 17. There’s a good chance it will beat consensus estimates and also deliver stronger-than-expected fourth-quarter guidance, all of which could give the stock a nice shot in the arm.
TSMC stock is already up 77% this year and it looks like the year will end on a strong note. Considering that this AI stock is trading at an attractive 22 times earnings even after its stellar run this year, buying it right now seems like a no-brainer given that it seems built for more upside potential .
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Advanced Micro Devices, Apple, Nvidia, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom, Intel and Marvell Technology and recommends the following options: short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.
1 Top Artificial Intelligence (AI) Semiconductor Stocks to Buy By Hand Before October 17 was originally published by The Motley Fool
