Taiwanese semiconductor manufacturing (NYSE: TSM) is the world’s largest chip foundry company. Without this, much of the technology we see today would not exist in the same capacity, and it could be argued that it is one of the most important companies in the world.
Recently the company reported excellent quarterly results, and the CEO said something incredible during the quarterly conference call. Results in one sector of the chip market have blown away expectations, and investors should consider buying more Taiwan Semi stock if they haven’t already.
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Taiwan Semiconductor’s products are used in all kinds of devices, but most notable are some of its largest customers Apple And Nvidiathe two largest companies in the world. These two would come to a standstill without TSMC’s chips, which shows how critical TSMC is. Both companies are participating in the artificial intelligence (AI) arms race, which should boost TSMC’s sales of AI chips.
Taiwan Semiconductor saw this trend as coming from a loophole, predicting that AI chips would grow at a compound annual rate of 50% for five years, while accounting for roughly a low percentage of sales. Considering that AI chips were about 6% of total revenue at the time, it seemed like an ambitious projection when they announced those guidelines in Q2 2023.
However, we now know that management was not ambitious enough. In his Q3 2024 conference call, CEO CC Wei said the following about AI chip demand:
We now predict that the revenue contribution from various AI processors will more than triple this year and represent a percentage of our total revenue by 2024. Backed by our technology leadership and broader customer base, we are well positioned to leverage the industry’s growth opportunities.
So just a year and a half after predicting that AI chips would account for a “low-teens percentage” in five years, it is on track to reach a “mid-teens percentage.” This shows the incredible demand for AI chips used in graphics processing units (GPUs), AI accelerators (custom chips that the big tech companies use for themselves), and CPUs.
Thanks to the tripling of AI revenues, management has increased its full-year revenue forecast to increase 30% year-over-year. AI chips are clearly having a huge effect on Taiwan Semiconductor, and the company is well positioned to benefit, but does that make the stock a buy right now?
After this earnings report and call, TSMC’s stock price rose about 10% the next day. However, the stock has given up many of these gains since that report and is now only up about 4%. So investors can have a little more confidence in buying the shares now that the increase is no longer as high as it used to be. The market is not blind to the success of Taiwan Semi and has therefore attached a premium price tag to it.
The stock trades for 31 times earnings and 22 times 2025 earnings. While the price tag for rolling earnings is a bit high, the price tag for the future isn’t that bad as it explains the massive growth that TSMC is looking to achieve next year expectation will go through. So if you have a long-term mindset, the price you have to pay today won’t be as expensive as you think, as long as TSMC lives up to expectations.
For a more historical perspective, Taiwan Semi’s stock has only been priced fairly high once in the last decade.
In 2020 and 2021, TSMC maintained its high valuation due to a chip boom driven by soaring demand for consumer equipment. The COVID pandemic had a major impact on this, and when demand was met, Taiwan Semiconductor’s shares crashed along with the rest of the market.
Demand for AI chips will likely be more sustainable in the long term, as we’ve only scratched the surface of the computing power needed to make serious gains in this sector. As a result, I think it’s safe to say that Taiwan Semiconductor will likely trade at a premium price for some time.
Taiwan Semiconductor is one of the best ways to invest in the chip industry and a complementary way to invest in AI. It’s one of my top holdings, and I think investors would be wise to make it theirs too.
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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.
You’ll Never Believe What the CEO of Taiwan Semiconductor Just Said About the Demand for Artificial Intelligence (AI) Chips was originally published by The Motley Fool
