As an investor, keeping an eye on the investment habits of billionaire hedge fund managers can serve two purposes. First, it can spark new investment ideas by drawing attention to companies you may not have considered. Secondly, it can help validate investment decisions already made.
Chase Coleman and his team at Tiger Global Management recently raised the hedge fund’s interest in investing in the artificial intelligence (AI) arms race in a popular way: Taiwanese semiconductor manufacturing (NYSE: TSM)commonly called TSMC.
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In the third quarter, Tiger Global Management increased its stake in the company by almost 20% and now owns 3.63 million shares (2.8% of the total portfolio) worth $671 million. The fact that the hedge fund is still buying suggests there may still be time for others to buy what is considered an expensive stock by some financial measures.
It is now the fourth quarter, so the question is whether there is still time to buy TSMC. Let’s take a closer look and see if an answer presents itself.
TSMC is the world’s largest manufacturer of semiconductor chips and serves as a manufacturer for several of the world’s largest technology companies and chip designers. Nearly every company in the high-tech space uses TSMC-manufactured chips, including Apple, Qualcomm, advanced micro devices, And Nvidia. These companies don’t have the facilities to mass produce the chips they design, so they outsource that very complicated work (some production processes involve hundreds of precision steps) to TSMC.
This puts TSMC in a great position, as even competitors like it Intel come to it to manufacture the chips used in their products.
As TSMC consistently pushes the boundaries of chip technology and introduces new manufacturing innovations time and time again, it has cemented itself as a top choice in the space. This can be seen in the growth of AI-related manufacturing efforts. It appears that TSMC management could see the potential that AI offered as early as the second quarter of 2023, when TSMC management forecast that AI-related revenues will grow at a compound annual growth rate (CAGR) of 50% over the next five years would grow and ultimately be responsible for a low growth rate. -teenage percentage of total sales. Management’s forecasts may have underestimated AI’s impact on revenue. In its recent third-quarter conference call, management noted that AI-related revenues are expected to triple this year and should represent a percentage of sales in the mid-teens by 2024.
It’s clear that TSMC’s growth is far from over.
TSMC is always pushing the boundaries of what is possible with chip manufacturing technology. The 3-nanometer (nm) chips are among the best available today, and efforts are already underway to get the 2 nm chips into production. Management said production will ramp up in 2025 and reach full scale by 2026.
Demand for pre-orders is already high, as management indicates it will exceed demand for the previous two generations (3nm and 5nm chips). This is because these chips are being developed to be much more efficient than previous generations. When a 2nm chip is configured to produce the same level of computing power as a 3nm chip, it consumes 25% to 30% less energy. Considering that energy costs are a huge input for anyone operating a massive data center, the cost savings from an efficiency upgrade that these chips can provide can quickly pay for themselves.
As a result, TSMC is likely to see strong revenue growth in the coming years. This supports management’s long-term guidance of 15% to 20% general revenue CAGR over the “next few years,” making it a stock that could easily beat the market.
Despite estimates of strong multi-year growth, TSMC stock still offers a reasonable valuation. TSMC stock trades at 26 times forward earnings, which isn’t a bad price to pay considering that the broader market, as measured by the S&P500traded at 23.5 times forward earnings.
TSM PE ratio (forward) data per YCharts
Investors should feel pretty good about paying that small premium for a company that’s expected to grow revenue 15 to 20% and has significant growth drivers ahead.
I already own TSMC stock, and seeing a billionaire adding more shares after the stock has already had a good run in 2024 (up nearly 87% so far in 2024) makes me encouraged about the future prospects for TSMC’s stock performance the company. Taiwan Semi is one of my top stocks for 2025, and I think now is a good time to buy more.
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Keithen Drury holds positions in Taiwan Semiconductor Manufacturing. The Motley Fool holds positions in and recommends Advanced Micro Devices, Apple, Intel, Nvidia, Qualcomm and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: Short February 2025 $27 calls on Intel. The Motley Fool has a disclosure policy.
Billionaire Chase Coleman Just Bought a Stock That’s Expected to Triple its Artificial Intelligence (AI) Revenues This Year, originally published by The Motley Fool
