Airport Runway-Bound CEO Spills on AI Chip Demand's Surprising Predictions from Taiwan Semiconductor
Airport Runway-Bound CEO Spills on AI Chip Demand's Surprising Predictions from Taiwan Semiconductor
Global Chip Giant, Taiwan Semiconductor Manufacturing (TSM, 1.32%), is the world's leading chip foundry company. Its absence would significantly impact the technology landscape, rendering numerous advancements less prominent. Given its crucial role, TSM could be considered among the world's most influential corporations.
In its latest earnings report, the company recorded remarkable results, prompting the CEO to make an intriguing statement during the quarterly conference call. A particular sector in the chip market has surpassed expectations, prompting investors to consider increasing their TSMC stock holdings, especially if they haven't already.
Artificial Intelligence (AI) demands fuel TSMC's growth
TSMC's products are integral to a multitude of devices, with notable clients like Apple and Nvidia, the world's top two companies. The cessation of operations in both corporations would be unimaginable without TSMC's chips, underscoring its importance. Both entities are actively engaged in the AI arms race, thereby strengthening TSMC's sales in the AI chip market.
TSMC anticipated the escalating demand for AI chips and envisioned a 50% compound annual growth rate within five years, eventually accounting for a low-teens percentage of their total revenue. At that point, AI chips constituted approximately 6% of their overall revenue, making the projection seem optimistic when announced in Q2 2023.
However, recent developments prove that management's expectations were far from ambition. In the Q3 2024 conference call, CEO C.C. Wei revealed:
We now anticipate the revenue contribution from various AI processors to overtriple this year and account for a mid-teens percentage of our total revenue in 2024. Our technology leadership and wider customer base enable us to capitalize on the sector's growth opportunities.
This startling revelation demonstrates the unprecedented demand for AI chips, vital for graphics processing units (GPUs), AI accelerators, and CPUs.
Consequently, management increased its full-year revenue forecast by 30%, attributing this surge in AI revenue. The omnipotence of AI chips over TSMC is undeniable, and the company appears well-equipped to leverage this burgeoning market. Nevertheless, does this justify the stock's purchase now?
Is the stock a worthwhile investment?
Following the earnings report and call, TSMC stock surged by approximately 10%. However, the shares have since recuperated, leaving a 4% gain. This diminished escalation encourages investors to consider entering the market with more confidence. The stock's premium valuation reflects TSMC's success, necessitating a higher investment.
TSMC's shares are priced at 31 times trailing earnings and 22 times 2025 earnings, with the latter number being more reasonable considering the massive expansion anticipated in the subsequent year. If you possess a long-term perspective, the current premium price tag seems less daunting as long as TSMC fulfills expectations.
A historical review of TSMC's pricing reveals that its stock was overvalued only once in the recent decade. In 2020 and 2021, TSMC maintained its high valuation due to a semiconductor boom fueled by significant demand for consumer devices. Incidentally, the COVID pandemic played a considerable role in propelling this demand. Subsequently, TSMC's stock plummeted alongside other market indicators when demand stabilized.
The demand for AI chips is forecasted to be more sustainable over the long term, given the nascent stage of computing power required to drive significant advancements within this industry. Consequently, it's safe to assume that TSMC will continue trading at a premium price point for an extended period.
Investors wishing to capitalize on the chip industry can consider TSMC one of the best choices. It also serves as an indirect means to invest in AI, positioning it among my top holdings. I strongly suggest that investors consider incorporating TSMC into their own portfolios as well.
Given the surge in demand for AI chips, which account for a significant portion of TSMC's revenue, investors might find it worthwhile to consider increasing their TSMC stock holdings. With the company anticipating a mid-teens percentage contribution from AI chips in 2024, investing in TSMC could provide opportunities to leverage the growing AI market.
Investors seeking to capitalize on the semiconductor industry's potential growth might want to seriously think about incorporating TSMC into their portfolios, as it serves as a strategic way to invest in the burgeoning AI sector.