Taiwan Semiconductor's AI Chip Demand Surges, Tripling Revenue Forecast

You'll Never Believe What Taiwan Semiconductor's CEO Just Said About Artificial Intelligence (AI) Chip Demand | The Motley Fool

AI chip demand is booming for the semiconductor foundry's services. Taiwan Semiconductor Manufacturing (TSM 1.26%) is the world's largest chip foundry company. Without it, much of the technology we see today wouldn't exist in the same capacity, and it could be argued that it is one of the world's most important companies. Recently, the company reported outstanding quarterly earnings, and the CEO said something unbelievable in the quarterly conference call. The results in one sector of the chip market have blown away expectations, and investors should consider loading up on more Taiwan Semi stock, if they haven't already. Taiwan Semiconductor's products are used in all sorts of devices, but most notably, some of its biggest clients are Apple and Nvidia, the world's two largest companies. These two would grind to a halt without TSMC's chips, which shows how critical TSMC is. Both of these companies are participating in the artificial intelligence (AI) arms race, which should boost TSMC's sales in the AI chip space. Taiwan Semiconductor saw this trend coming from a ways out and projected that AI chips would grow at a 50% compound annual rate for five years, when they would then make up around a low-teens percentage of revenue. Considering that AI chips made up about 6% of total revenue at that time, it seemed like an ambitious projection when they announced that guidance in Q2 2023. However, we now know that management wasn't ambitious enough. In its Q3 2024 conference call, CEO C.C. Wei had this to say about AI chip demand: We now forecast the revenue contribution from several AI processors to more than triple this year and account for mid-teens percentage of our total revenue in 2024, supported by our technology leadership and broader customer base, we are well-positioned to capture the industry's growth opportunities. So, just a year-and-a-half after it gave the projection that AI chips would make up a "low-teens percentage" in five years, it is on track to make up a "mid-teens percentage." This shows the incredible demand for AI chips that go into graphics processing units (GPUs), AI accelerators (custom chips that the big tech companies utilize for themselves), and CPUs. Thanks to AI revenue tripling, management raised its full-year revenue forecast to rise by 30% year over year. AI chips are clearly having a huge effect on Taiwan Semiconductor, and it's well-positioned to take advantage, but does that make the stock a buy right now? After this earnings report and call, TSMC's stock price rose about 10% the following day. However, the stock has given up a lot of those gains since that report and is only up around 4% now. So, investors can have a bit more confidence in buying the stock now that the bump isn't as high as it used to be. The market isn't blind to Taiwan Semi's success and has given it a premium price tag as a result. The stock trades for 31 times trailing earnings and 22 times 2025 earnings. While the trailing earnings price tag is a bit steep, the forward-looking one isn't so bad as it accounts for the massive growth TSMC is expected to undergo next year. 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 meets expectations. For a more historical outlook, Taiwan Semi's stock was priced rather high just once in the last decade. In 2020 and 2021, TSMC sustained its high valuation because of a chip boom brought about by massive demand for consumer devices. The COVID pandemic heavily influenced this, and when demand was fulfilled, Taiwan Semiconductor's stock crashed along with the rest of the market. The demand for AI chips will likely be more sustainable over the long term, as we're just scratching the surface of the computing power needed to make serious gains in this industry. As a result, I think it's safe to say that Taiwan Semiconductor will likely trade at a premium price point for some time. Taiwan Semiconductor is one of the best ways to invest in the chip industry and an ancillary way to invest in AI. It's one of my top holdings, and I think investors would be smart to make it one of theirs as well.

This Company Predicts Its Artificial Intelligence (AI) Revenue Will Triple | The Motley Fool

Although the artificial intelligence (AI) investing trend has been going on for some time, plenty of companies are still seeing rapid growth in products related to AI. One of those is Taiwan Semiconductor (TSM 4.12%), the world's largest chip manufacturer. Taiwan Semi, as it's often called, is seeing massive growth from its AI product line, which is starting to become a significant part of its business. It's going so well that management projects AI-related revenue to triple this year. That's huge news for investors, but is it enough to buy the stock? AI-related products could encompass a lot of what Taiwan Semi does. One of its largest business segments is manufacturing chips for Apple, which made up around a quarter of total sales in 2021, 2022, and 2023. With new iPhones equipped with AI features, investors would be forgiven for thinking this category falls under the AI umbrella. Management defines AI-related items as chips that go into GPUs (graphics processing units), AI accelerators, and central processing units (CPUs) performing training and inference functions. Basically, if a chip is being placed in a computing server dedicated to AI training and is not related to networking equipment in that server, then it's placed in this category. This is a pretty specific category and gives investors a great idea of how TSMC's AI business is faring. It's incredible news for investors, with management forecasting that AI-related revenue will more than triple this year and account for a mid-teens percentage of Taiwan Semi's total revenue in 2024. It also represents an acceleration from where management thought they would be. In second-quarter 2023, management guided that AI-related revenue would grow at around a 50% compound annual growth rate (CAGR) in the next five years, when it would make up a low-teens amount of its total revenue. Clearly, TSMC's AI chip growth is far ahead of schedule, making it a strong AI investment pick. However, another critical part of the company's investment thesis is that it doesn't require you to pick a winner in the AI space. Because all these AI companies need chips to power either GPUs or custom-built chips specifically designed for AI training, they turn to Taiwan Semi for its manufacturing capabilities. CEO C.C. Wei has this to say about that fact in its conference call: "Almost every AI innovator is working with TSMC. And so, we probably get the deepest and widest growth of anyone in this industry." That sums up Taiwan Semiconductor's investment thesis extremely well, as TSMC will benefit regardless of which company develops a winning AI product. This enthusiasm has made the stock a bit expensive, as it trades for 30.6 times trailing earnings. However, that strong growth is expected to continue in 2025, as the stock trades for 21.8 times 2025 earnings. That's not a bad price to pay for the stock, especially if it can maintain the growth it put up in the third quarter. Taiwan Semi grew revenue at a 36% year-over-year pace (in U.S. dollars), and earnings per share increased by 51% to $1.94. That's a solid performance, and if Taiwan Semi keeps that growth up, the price you pay for the stock today will be worth it. Taiwan Semiconductor is a fantastic AI investment because it doesn't require you to pick a winner in the space. With AI revenue becoming a meaningful part of the business, TSMC has risen to the top as one of the best investments you can make today.

Huge News for Investors In This Artificial Intelligence (AI) Stock | The Motley Fool

The company got a big green light on its plans for geographic expansion. It's TSMC's world; the rest of us are just living in it. 2024 is turning into a positive year for Taiwan Semiconductor Manufacturing (TSM 1.26%), the leading manufacturer of advanced semiconductors around the world. The company has embarked on a big expansion outside of its home market of Taiwan due to geopolitical concerns with China, leading it to invest billions in factories in Arizona. Last week, the company announced a major milestone with these new United States factories. Here's why TSMC's latest update is important for the business moving forward and what it could mean for the stock over the long term. TSMC's factory in Arizona is getting prepped for commercial production in 2025. As it ramps up the facility, the company tests the yield of the semiconductor wafers pumped out by its manufacturing process. These wafers then become advanced computer chips, making them vital to companies like Apple or Nvidia and the artificial intelligence (AI) revolution. The higher the yield, the more of each wafer that works in the manufacturing process. Essentially, it is a measure of how much of each wafer is working correctly. Last week, TSMC reported that it achieved 4% higher yields at its Arizona facility compared to its factories in Taiwan. This is huge news for the company. Why? Investors and analysts doubted that TSMC's factories would be as successful outside of Taiwan, which has been the beating heart of the semiconductor market for ages. Manufacturing advanced semiconductors is no easy feat, requiring teams of scientists, engineers, advanced technologies, and institutional know-how that have been built up over decades. Now, TSMC has alleviated fears this process could not be replicated in the United States. Higher yields mean TSMC can sell more semiconductors per unit of production while costs stay the same. In other words, it should lead to higher profits, all else being equal. If TSMC was unable to replicate its Taiwan yields in Arizona, there was a risk its profit margins would come down significantly as all these new facilities started coming online. These fears are now being put to bed. These Arizona facilities -- along with others in Japan and Europe -- will be important for the AI market over the next five to 10 years. TSMC is perhaps the only company currently capable of building the most advanced semiconductors in the world for companies like Nvidia, which is the key supplier for all the data center spending associated with the AI boom. In simpler terms, as AI spending grows, so does TSMC's revenue. All these new factories should help the company keep up with customer demand, which looks insatiable. For example, last quarter, TSMC's high-performance compute (HPC) segment grew 11% quarter on quarter and now makes up 51% of overall sales. Just two years ago, in the same quarter, the HPC segment was just 39% of overall sales. HPC is spending on advanced semiconductors for data centers, meaning AI. Investors should be tracking the HPC segment closely, as it is now the majority of TSMC's consolidated revenue and is growing like wildfire. If spending for data centers and AI keeps booming, TSMC's revenue will likely keep growing at a fast clip. With wafer yields close to the same levels as in Taiwan, profit margins should stay high as well. Last quarter, the operating margin was a robust 47.5%, which shows how valuable TSMC's advanced computing products have become. With these booming sales and profits, TSMC's stock has begun to soar. In the last year alone, shares are up over 100% and briefly traded at a market cap of over $1 trillion. These gains have brought the stock's price-to-earnings ratio (P/E) to 31, which is a premium valuation and slightly higher than the S&P 500 index average. Some investors would turn away from TSMC stock due to its high P/E. However, I think this is missing the forest through the trees. Yes, TSMC has a high P/E, but it has proven over the long term it can grow earnings at a fast clip and has a big tailwind at its back in the form of AI spending. In the last 10 years, the company's earnings per share (EPS) have grown cumulatively by close to 300%. Despite this high valuation, I think TSMC stock is a buy at these prices if you are a long-term believer in AI. One of the best businesses in the world keeps expanding its lead and is now showing it can replicate its manufacturing process in other geographies.

2 Attractive Artificial Intelligence (AI) Stocks to Buy Hand Over Fist in November | The Motley Fool

These companies take advantage of the growing adoption of AI hardware and software. The past couple of years have been absolutely phenomenal for technology stocks, which is evident from the 90% gains clocked by the Nasdaq-100 Technology Sector index during this period, and artificial intelligence (AI) is one of the main reasons behind this outstanding surge. After all, AI has created significant demand for hardware such as semiconductors and server components, while also creating the need for software that could be deployed in real-world situations to help users boost their productivity and improve efficiency. More specifically, the demand for AI hardware is forecast to increase at an annual rate of 31% through 2035, generating $624 billion in annual revenue. Meanwhile, the AI software market is expected to clock a compound annual growth rate of almost 34% over the next five years. That's the reason why we will take a closer look at the AI-related prospects of Taiwan Semiconductor Manufacturing (TSM 4.12%), popularly known as TSMC, and Twilio (TWLO 2.34%), two companies that can help investors take advantage of the growing demand for both AI hardware and software. Semiconductors play a critical role in the proliferation of AI, with AI models being trained using chips such as graphics processing units (GPUs), central processing units (CPUs), and application-specific integrated circuits (ASICs). This is the reason why the likes of Nvidia, Advanced Micro Devices, Broadcom, and Marvell Technology are seeing robust demand for their chips. The common link between these companies is TSMC. The semiconductor companies mentioned above are fabless in nature, which means that they simply design their chips while manufacturing is outsourced to a foundry such as TSMC. As a result, TSMC reported a terrific acceleration in its growth this year. The Taiwan-based foundry giant's revenue in the first nine months of 2024 increased by 32% year over year. For the full year, TSMC management expects revenue to increase by almost 30%. That would translate into a top line of $90 billion based on the company's 2023 revenue of $69.3 billion. It is worth noting that TSMC's revenue contracted almost 9% last year as the company struggled due to poor demand for smartphones and personal computers (PCs). However, the arrival of a new catalyst in the form of AI has turned around TSMC's fortunes remarkably in 2024, which is evident from the impressive growth it has clocked in the first nine months of the year. That's not surprising, as the demand for AI chips has simply taken off, with Future Market Insights estimating that this market could clock an annual growth rate of 26% over the next decade. This puts TSMC in a terrific position to clock robust growth for years to come considering that it manufactures chips for the major players in this market. Moreover, TSMC is the world's leading foundry with a market share of 62%, according to Counterpoint Research. This further reinforces the fact that the company is set to play an important role in the growth of the AI chip market in the long run. However, this isn't where TSMC's AI-related prospects end. The company also manufactures chips for consumer devices such as smartphones and PCs. AMD, Apple, and Qualcomm use TSMC's fabrication plants for manufacturing chips for their products. With the demand for AI-enabled smartphones and PCs set to take off, this could turn out to be another lucrative growth driver for TSMC. All this explains why analysts are forecasting TSMC to clock healthy earnings growth moving forward. More importantly, investors can buy this stock at an attractive 21 times forward earnings right now, which is a discount to the Nasdaq-100 index's forward earnings multiple of 30 (using the index as a proxy for tech stocks). So, investors looking to add an AI stock to their portfolios in November should definitely take a closer look at TSMC as it has the potential to deliver more upside. Twilio operates in the communications platform-as-a-service (CPaaS) market, offering application programming interfaces (APIs) to customers, by which they can connect with their customers through multiple channels such as voice, video, chat, email, and others. The company also provides a customer data platform by which it creates a centralized database containing all the interactions a company has with its customers. Twilio is now using AI to help its clients improve their customer service experience as well as sales by combining its expertise in communications with customer data. The company pointed out on its latest earnings conference call that it is "embedding AI and machine learning throughout the Twilio platform," a move that it says will allow it to "automate capabilities, boost productivity, and drive personalization at scale." Management added that customers who have started using Twilio's AI tools saw an improvement in their sales performance. CEO Khozema Shipchandler said on the earnings call: The company recently ran an email campaign targeting customers most likely to purchase Apple products and saw a 592% increase in sales per email, this is just one of the many examples of the unique value that Twilio offers, helping brands create better engagement, deliver greater value and build more trusted customer experiences. The adoption of AI tools by Twilio customers is now driving an improvement in the company's sales. It reported third-quarter revenue growth of 10% year over year to $1.13 billion, a nice improvement over the 5% year-over-year growth it recorded in the same quarter last year. Even better, Twilio's addition of AI tools to its platform is encouraging customers to spend more money. This is evident from its dollar-based net expansion rate of 105% for the third quarter, which was again an improvement over the year-ago period's reading of 101%. A dollar-based net expansion rate of over 100% means that Twilio's existing customers increased their usage of the company's solutions, or adopted more of its offerings. That's because this metric compares the spending by Twilio's customers in a quarter to the spending by the same set of customers in the year-ago period. The improved customer spending and Twilio's focus on keeping costs in check are the reasons why its earnings increased at an impressive rate of 76% from the same period last year to $1.02 per share in the previous quarter. Consensus estimates expect Twilio's earnings to increase at an annual rate of almost 20% for the next five years, which means that its bottom line could hit $6.09 per share in 2028 (using 2023 earnings of $2.45 per share as the base). Assuming it can hit that mark over the next five years and trades (at that time) in line with the Nasdaq-100 index's forward earnings multiple of 30, its stock price could hit $183. That would be a 110% increase from current levels. Twilio currently trades at just 22 times forward earnings, which means that it is attractively valued. Investors have an opportunity to buy it before it surges higher following its latest quarterly report.