Microsoft Corp (NASDAQ:MSFT) CEO Satya Nadella has made the Redmond-based software giant the biggest beneficiary of the AI revolution thanks to his vision and strategy. In 2019, when Microsoft invested $1 billion in OpenAI, the company behind ChatGPT, hardly anyone noticed. But when ChatGPT launched and the floodgates of generative AI innovation opened, Microsoft was seen as the leader in the AI arms race. Microsoft’s investment in OpenAI has now swelled to $13 billion. The company’s long list of AI catalysts includes the revival of Bing search, AI assistant Co-pilot and AI PCs.
Is MSFT Overvalued?
But some believe the stock has rallied too much and needs a breather amid growing concerns on Wall Street that just a handful of companies are now responsible for the bulk of the market’s gains. Morgan Stanley’s Lisa Shalett recently said in a note that the Magnificent Seven group of stocks, which includes MSFT, is poised to see a “radical slowdown” in earnings growth, according to a report from Seeking Alpha. Goldman Sachs equity strategist David Kostin projects Microsoft’s second-quarter revenue growth to come in at 15%, down from 17% in the previous quarter, according to another report from Seeking Alpha. The company is expected to report earnings on July 23. With the company getting too much attention and the stock’s AI expectations being too high, any slowdown in upcoming earnings growth could send the stock lower.
There are always undervalued players in the market for those who know where to look. Let’s talk about an AI underdog that analysts believe has more upside based on its strong growth catalysts.
Trending: If there was a new fund backed by Jeff Bezos that offered a target yield of 7-9% with monthly dividends, would you invest in it?
Taiwan Semiconductor: A Better AI Stock Than MSFT?
Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) is one of the world’s leading and largest semiconductor companies. Tweaktown reports that the company’s long list of customers includes tech giants such as Apple, Nvidia, Qualcomm, AMD, and Broadcom, among many others. The AI revolution is expected to further boost Taiwan Semiconductor’s demand and market share. According to Tweaktown’s report, the company has a whopping 70% to 80% share of the 5nm semiconductor market and 90% share of the 3nm chip market. Data from consulting firm TrendForce shows that Taiwan Semiconductor held a 60% share of the global foundry market in 2021.
Taiwan Semiconductor’s AI Revenue Growth Forecasts
Taiwan Semiconductor’s chips are used in everything from smartphones to electric car sensors to personal computers. But the huge demand for high-end chips unlocked by the generative AI boom has made TSM a promising AI stock. During a first-quarter earnings call, Taiwan Semiconductor’s management said it expects the revenue contribution from AI processors to double this year, accounting for the low teens percent of total revenue. AI revenue is expected to grow at a CAGR of 50% over the next five years, accounting for more than 20% of the company’s total revenue by 2028.
Taiwan Semiconductor’s Moat in Industry
Taiwan Semiconductor’s moat in the AI chip industry is strong and broad. For one, the high-end chip manufacturing industry isn’t easy to enter, even for large companies. Blackridge Research and Consulting reports that setting up a single 3nm fab could cost up to $20 billion. Moreover, Taiwan Semiconductor’s real strength lies in producing millions of chips with almost no defects — the company’s yield is over 95%, according to the Atlantic Council. Only Samsung is expected to come close to Taiwan Semiconductor’s quality and production capacity in the coming years, amid its massive investments and plans to enter the fab industry. Other than Taiwan Semiconductor, it has no formidable competitors.
Don’t Miss: Elon Musk and Jeff Bezos Are Bullish on a City That Could Dethrone New York Investing in the Booming Real Estate Market Has Never Been Easier
Is the threat from China exaggerated?
Despite its dominance in the AI chip industry, Taiwan Semiconductor’s share price growth has been limited and its valuation still looks attractive compared to its peers. The stock’s forward P/E is 27.7 (47 for Nvidia and 46 for AMD). The biggest concern surrounding TSM is a potential Chinese escalation against Taiwan, as the company’s main manufacturing operations are based in Taiwan. However, many analysts believe that these concerns are overblown and that the company faces no short-term risks. They say that China cannot afford to engage in a direct conflict with the US. According to a report by the Hudson Institute, any disruption to Taiwan’s semiconductor industry could result in an economic loss of $1.6 trillion for the US. Taiwan Semiconductor’s dominance in the chip industry is seen as a “Silicon Shield” for Taiwan, which the country can use to deter attacks. Earlier this month, Taiwan Semiconductor Chairman and CEO CC Wei said it is “impossible” to move chip production outside Taiwan and that 80% to 90% of chip production will remain in the country.
Wall Street Thinks AI Boom Will Benefit Taiwan Semiconductor
Wall Street is also becoming increasingly bullish on the company. Bernstein analyst Mark Li recently said that high-end phones and advanced nodes could help Taiwan Semiconductor beat its 2024 guidance. The analyst thinks the company’s data center revenue is growing as expected. Li raised his price target on TSM to $200 from $150. He expects Taiwan Semiconductor to grow revenue 25% and EPS 28% in 2024. Earlier this month, BofA’s Brad Lin also raised his price target on TSM to $180. Lin thinks new AI plans unveiled by Apple and other companies at the Computex 2024 event will fuel the on-device AI trend, benefiting TSMC, which the analyst called the “key enabler” of AI prosperity.
There are better opportunities with high returns
The current high interest rate environment has created an incredible opportunity for income-seeking investors to earn huge returns, but not through dividend stocks… Certain real estate investments in the private market offer retail investors the opportunity to take advantage of these high-yield opportunities, and Benzinga has identified some of the most compelling options for you to consider.
For example, Base Camp Alpine Notes offers a 9% APY target with a term of just three months, making it a powerful short-term cash management tool with incredible flexibility. EquityMultiple has issued 61 Alpine Notes Series and has met all payment and funding obligations with no missed or late interest payments. With a low minimum investment of just $1,000, With Basecamp Alpine Notes, building a high-yield portfolio has never been easier.
Don’t miss this opportunity to profit from high yield investing while rates are high. Check out Benzinga’s favorite high yield offerings.
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
“SECRET WEAPON FOR ACTIVE INVESTORS” Boost your stock market game with the #1 “news & everything else” trading tool: Benzinga Pro – Click here to start your 14-day trial now!
Want to receive Benzinga’s latest stock analysis?
This article Considering Microsoft Corp (MSFT) Ahead of Earnings Report? Here’s a Better Alternative originally appeared on Benzinga.com
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
