Watching the moves of billionaire hedge fund managers is a wise investment strategy because these investors didn’t reach their status without making some smart decisions.
Funds with more than $100 million in assets must disclose their quarter-end holdings to the Securities and Exchange Commission (SEC) within 45 days of the end of that quarter, and these disclosures are then made available to the public. This gives us an idea of what moves these Wall Street professionals are making, albeit in a delayed manner.
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There’s one stock that two billionaires I follow both bought in the third quarter Taiwanese semiconductor manufacturing (NYSE: TSM)one of my favorite ways to invest in the artificial intelligence (AI) arms race. Tiger Global Management’s Chase Coleman and Point72’s Steve Cohen made the move, though others undoubtedly picked up TSMC (as it’s commonly known) this quarter as well.
Taiwan Semiconductor is the world’s largest third-party chip foundry, producing cutting-edge chips for almost every company at the forefront of digital technology. Apple And Nvidia are notable clients, but there are many more.
Part of the reason TSMC has risen to the top in its corner of the chip industry is its culture of constant innovation. In the world of chips, progress comes with new and increasingly smaller “process nodes” – defined by manufacturers’ ability to reduce the size of transistors and other elements on the chips, as well as the spaces between them. The better TSMC and its colleagues can pack these elements into a chip, the more powerful, faster and more energy efficient the chip will be.
Today’s next-generation chip technology is the 3-nanometer (3nm) process node – although that ‘nm’ no longer actually refers to a specific component size or aperture. In recent years, node names have become marketing terms, and various manufacturers use their own standards to define exactly what they mean in terms of improved chip density. Nevertheless, a 3nm chip is an impressive technological achievement that only a few companies can produce.
Demand for 3nm chips has been significant. They first contributed to TSMC’s revenue in the third quarter of 2023, accounting for just 6% of revenue. In the most recently reported quarter, 3nm chips accounted for 20% of sales; only 5nm chips contributed a larger share.
However, TSMC doesn’t stop there. It is preparing to begin production of 2nm chips for customers in 2025, with full ramp-up in 2026. The revenue contribution of this process node is likely to be greater than that of previous generations, as early demand for this technology from the chip designers customers are already surpassing those of 3nm and 5nm launches.
This is due to the efficient nature of 2nm technology, as it offers a 25% to 30% energy efficiency improvement at the same speed as 3nm chips. Considering that 3nm chips already deliver impressive performance, this process node should be popular with GPU makers (like Nvidia) as it will allow them to offer products with less power consumption – and electricity is a huge input cost for it creating AI models.
There is a clear investment case for TSMC on the business side, but does the financials support this?
In the third quarter, Taiwan Semiconductor achieved strong growth of 39% in New Taiwan (NT) dollars, which translates to 36% in US dollars. Earnings per share (EPS) rose 54% in NT dollars. That was not an anomaly; Wall Street analysts predict that sales will rise 25% and earnings per share will rise 26% by 2025 thanks to demand for AI and as investments in new chip technology begin to pay off.
The shares trade for just twenty times 2025 earnings, which I think is a no-brainer price to pay. Taiwan Semiconductor’s chip manufacturing technology is unparalleled, and its growth rates back that up. The company is one of the best ways to invest in AI, and the strong holdings of multiple billionaires in the stock back up this investment thesis.
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Keithen Drury holds positions in Taiwan Semiconductor Manufacturing. The Motley Fool holds positions in and recommends Apple, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
These Two Billionaires Just Bought My Favorite AI (Artificial Intelligence) Stocks Originally published by The Motley Fool
