Taiwan Semiconductor and AI: A Booming Synergy in the Chip Industry

Why Taiwan Semiconductor, ASML, and Other Artificial Intelligence (AI) Semiconductor Stocks Rallied on Thursday | The Motley Fool

Better-than-expected results from memory chip specialist Micron provided fresh evidence the adoption of AI still has room to run. There's been an increased focus on the semiconductor industry since early last year. Investors have been enthusiastic about recent developments in the field of artificial intelligence (AI), which has sparked a flurry of activity in the space. These powerful algorithms are highly dependent on hardware that features the most advanced processors, which has buoyed much of the sector. However, after a sharp run-up, many AI stocks have been treading water over the past several months as investors have waited for evidence the trend still has room to run. With that as a backdrop, it's noteworthy that in trading on Thursday, Taiwan Semiconductor Manufacturing (TSM 2.50%) had climbed by 1.9%, ASML Holding (ASML 4.35%) had rallied 3.7%, and Indie Semiconductor (INDI 7.41%) had jumped 7.4% as of 12:46 p.m. ET. A check of all the usual suspects -- regulatory filings, financial reports, and changes to analysts' price targets -- turned up nothing in the way of company-specific news to explain those stock price increases. This suggests that investors were reacting to the financial results from another player in the AI revolution, and that the news was good. Micron Technology (MU 14.24%) released its fiscal 2024 fourth-quarter report after the closing bell Wednesday, and investors let out a collective cheer. In the period, which ended Aug. 29, the computer memory specialist's revenue soared 93% year over year to $7.75 billion -- a company record -- while also increasing 14% sequentially. This resulted in adjusted earnings per share (EPS) of $1.18, much improved from its loss of $1.07 per share in the prior-year quarter. Driving those results was surging demand for high-bandwidth memory of the type used in data centers and AI, which boosted Micron's profit margins. The results sailed past Wall Street analysts' consensus expectations for revenue of $7.65 billion and adjusted EPS of $1.11. It wasn't just the robust results that drove the stock higher, as Micron's forecast suggested the growth spurt would continue. For its fiscal 2025 first quarter, management is guiding for revenue of $8.7 billion, which would equate to growth of 84% year over year, and adjusted EPS of $1.74, which would be an increase of 83%. Management cited strong AI data center demand in driving sales growth for its DRAM memory and NAND flash-based storage. The subsequent run-up in other stocks in the chip space suggests that investors view Micron's report as convincing evidence that the demand for AI and the hardware to support it is ongoing. They also clearly view these developments as positive for a broad cross-section of companies in the AI space. Micron's robust results should help dispel any notion that demand for AI is waning. It's also not surprising that each of the companies in our trio has a specialty connected to the specific types of semiconductors that will benefit from the growing adoption of AI. The evidence suggests the accelerating adoption of AI will continue to increase the fortunes of companies in the semiconductor space. It's worth noting, however, that all AI stocks are not created equal. From a valuation perspective, Taiwan Semiconductor and ASML are inexpensive, selling for 22 times and 25 times forward earnings, respectively. Indie Semiconductor, on the other hand, isn't profitable, making it a much riskier investment. That said, each of these stocks has intriguing potential, particularly given the continuing opportunities in the AI space.

Taiwan Semiconductor Stock Is a Magnificent Opportunity for Savvy Investors | The Motley Fool

Taiwan Semiconductor is set to benefit massively from AI tailwinds. Taiwan Semiconductor (TSM 4.13%) is one of the most underrated artificial intelligence (AI) investments. TSMC is the world's leading semiconductor foundry and fabricates chips for the most technologically advanced devices. Regardless of who wins the AI race, Taiwan Semi will benefit massively, which is why the stock is such a good investment. Taiwan Semi gives its clients access to the world's most advanced chipmaking technology. Right now, TSMC's most powerful chip has electrical traces spaced 3 nanometers (nm) apart. However, next-generation 2nm chips are already in development and offer a promising efficiency boost over previous generations. These technologies can be used to design chips for smartphones, graphics processing units (GPUs), or any other device that requires extreme computing power. So, if one smartphone company dominates another or a particular generative AI model outperforms and becomes the go-to model for all users, Taiwan Semi will still benefit. This neutral position is rare in investing, but it makes Taiwan Semi one of the best investments. This position is working out well for TSMC, and management has made some bold predictions because of it. In 2022, management laid out its long-term growth projection for the company. Although it didn't put a specific end date on it, TSMC expects to grow revenue at a compounded annual growth rate (CAGR) of between 15% and 20% for the next "several" years. AI revenue is expected to be its fastest-growing segment, boosting this growth. Management expects this division to grow at a 50% CAGR for the next five years, when it will make up about a tenth of the company's overall business. That's huge growth from an emerging segment and shows how TSMC is affected by the massive AI demand wave. There are many growth tailwinds blowing in TSMC's favor, yet the stock doesn't carry as much of a premium price tag as you'd expect. However, the price tag makes more sense when you consider that TSMC pays a nice 1.4% dividend and is slated to grow at an above-market pace. Furthermore, when stalwarts like Walmart (31.9 times forward earnings) and Coca-Cola (24.7 times forward earnings) trade at around the same price as TSMC, it's clear that you're not paying that much of a premium to own a best-in-class business. With the broader market (measured by the S&P 500) trading at 22.7 times forward earnings, I'd say the premium that TSMC fetches due to faster-than-market growth and business prospects is earned. Wall Street analysts also agree that the stock has a fairly strong upside. With an average one-year price target of $206, that indicates the stock has about 17% upside in the next year. While this shouldn't be the final factor in deciding whether to buy the stock, it is nice to know that analysts are expecting solid stock performance as well. Taiwan Semiconductor is a great stock to buy now and stash away. The trend of more calculation-intense technologies isn't going away, and TSMC stands to benefit as a result.

This AI Stock Is Falling: Should You Buy Shares? | The Motley Fool

The investing world can't stop talking about Nvidia. The chipmaker was briefly the largest company in the world by market cap and has seen soaring profits due to the insatiable demand for its artificial intelligence (AI) semiconductor products. But this isn't the only company benefiting from the AI revolution. Enter Taiwan Semiconductor Manufacturing Company (TSM 4.13%), otherwise known as TSMC. The manufacturer of computer chips for Nvidia has seen its shares fall from their high in July after slower-than-expected revenue growth. Let's see if this presents a buying opportunity for investors focused on the long-term potential of AI. Unlike legacy computer chip manufacturers such as Intel, Nvidia doesn't make the chips it designs. The expensive manufacturing is outsourced to third parties that focus solely on manufacturing and assembling computer chips. TSMC is widely regarded as the best in the world at making advanced computer chips and is a key supplier for Nvidia and many other semiconductor design firms. Without TSMC, the advanced chips from Nvidia don't actually hit the market. It's that simple. This is known as the foundry semiconductor manufacturing model. TSMC solely focuses on building chips, while other companies design them. With some of the smartest engineers in the world and decades of reinvestment in growth, the company now commands more than 60% of the foundry market. Sixty-seven percent of its revenue comes from the three-, five-, and seven-nanometer computer chip platforms. Smaller nanometers between transistors means more density, which equals higher performance computing. Outside of China, the only company that has reached five-nanometer chips is Samsung. Therefore, if Nvidia or anyone else wants to manufacture the most advanced computer chips in the world, it has to go to TSMC. TSMC continues to reinvest to extend this lead while diversifying geographically outside of its home market in Taiwan, which poses a geopolitical security risk due to escalating tensions between the U.S. and China. It's investing a total of $40 billion to build manufacturing facilities in Phoenix to give itself a footprint in the U.S. Nvidia's products are hot commodities due to the AI spending boom. This has allowed it to greatly increase prices on its advanced semiconductor products in recent years. While we don't have exact details, TSMC, in all likelihood, will have passed on its own price increases to Nvidia since Nvidia can't go anywhere else for the most advanced chip production in the world. Demand and price increases for advanced computer chips are the main reason TSMC's revenue rose 128% during the past five years. It has made up for slowdowns across other segments of the business. The second-largest segment -- smartphone revenue -- fell by 1% in Q2 from Q1. High-performance computing grew by 28% quarter over quarter and now makes up more than half of TSMC's sales. You can see this visually in a chart of TSMC's long-term operating income. Since the pandemic, operating earnings have taken a step up and recently hit $32 billion during the past 12 months. A lot of this is due to price hikes. As mentioned in the opening section, investors have slightly cooled on TSMC stock after seeing its revenue fall slightly in August and July. Revenue in August decreased 2.4% from July, which has likely scared some people about the momentum of the AI boom. However, I think investors need a longer-term perspective. Revenue was still up more than 30% year over year in the month, and that is with the second-largest revenue segment (smartphones) going through a rough patch. Today, the stock has a market cap of about $800 billion. Net income during the past 12 months was roughly $30 billion and should march higher as more and more spending goes to accelerated computing products from the likes of Nvidia. Remember, TSMC is one of the only companies in the world that can build these chips. At the current price, the stock trades at a price-to-earnings ratio (P/E) of 32. While a P/E over 30 is considered high, the company has minimal competition and a huge runway to reinvest during the next 10 years. There's still a lot of opportunity left in TSMC stock for those who buy and hold for the long term. This company's earning should grow for many years to come.