TSMC's Crucial Role in AI Chip Manufacturing Attracts Investors and Industry Praise

Nvidia's Huang says buying TSMC's stock is 'very smart.' The pros share their take

Taiwanese chipmaker Taiwan Semiconductor Manufacturing Co made headlines last week following Nvidia CEO Jensen Huang's remarks that buying its stock would be "very smart. " "Well, first of all, I think TSMC is one of the greatest companies in the history of humanity, and anybody who wants to buy TSMC stock is a very smart person," he said on Friday during his Taiwan visit. Shares in TSMC rose on Monday and Tuesday and are up 9.77% since the start of the year. Last month, TSMC's market capitalization crossed $1 trillion, thanks to a strong sales forecast driven by growing artificial intelligence demand. Its market value now stands at 30.42 trillion New Taiwan dollars, which is just under $1 trillion, according to LSEG data. 2330-TW 1Y mountain TSMC shares TSMC manufactures advanced chips, including for major chip designers such as Nvidia and AMD . The Taiwanese firm has now taped out a new graphics processing unit and silicon photonics processor for Nvidia's next-generation Rubin-architecture supercomputers, meaning chip design has been finalized and manufacturing can begin. The firm has cut the use of Chinese chipmaking equipment in its most advanced chip plants to avoid potential U.S. curbs that could impede production, Nikkei reported, citing comments from sources familiar with the matter. FactSet data shows that most analysts are bullish on TSMC. Of the 44 analysts covering the stock, 42 give it a buy or overweight rating, while one has a hold and another has a sell rating. Analysts' average price target is NT$1,354.27, giving it 15.7% potential upside. The spotlight on TSMC has now raised questions about whether those not already invested should buy the stock. A neutral view Tariq Dennison, co-founder and investment advisor at GFM Asset Management, is neutral on TSMC. It's "notable when an industry leader says something so positive about another company in the same industry," he told CNBC Pro . However, Dennison said, he tends to "get cautious, or even bearish," when too many people are bullish on a stock or sector. Dennison attributed Huang's view to TSMC's "very clear lead" in the manufacturing of the most advanced semiconductors, including 2 to 3 nanometer technology, and the likelihood that it will "keep that lead for many years to come. He also inferred that Huang expects TSMC to "keep growing and monetizing that lead for many years to come." That's a "much more optimistic assumption than I would make," the wealth manager said. He said he believes TSMC is of high quality and its growth prospects are "well priced in a 23 times forward earnings, versus the 4.25% yield on the 10-year U.S. Treasuries." However, he cautioned that its valuation underprices the risks of geopolitical uncertainties and unforeseen technological disruptions. The bulls However, Arthur Lai, head of technology research Asia at Macquarie Capital, is bullish on TSMC. Huang's "comments revalidate our raised CoWoS [chip-on-wafer-on-substrate] forecasts and reinforce that Nvidia's execution is a multi-year demand driver for AI packaging and interconnects," he said. CoWoS is an advanced packaging technology developed by TSMC. "We see continued upside for the advanced packaging and networking supply chain," Lai added in an Aug. 26 note. Lai had raised his target price on the stock by 2% to NT$1,310 following the company's second-quarter results in July. He simultaneously increased his 2025 and 2026 net profit forecast for TSMC by 11% and 5%, respectively, given better-than-expected AI growth and gross profit margin impact from foreign exchange charges. That was thanks to TSMC's solid near-term AI demand, even as the company anticipates softness in its revenue in the last quarter of the year in light of "tariff-related uncertainties and a still cautious consumer segment," Lai wrote in a July note. Phelix Lee, equity analyst at Morningstar, is also bullish on TSMC. He has a five-star rating on TSMC and considers it "attractively valued" given its quasi-monopoly in manufacturing AI and other premium semiconductor chips, he told CNBC Pro. Morningstar gives stocks a rating of between one and five stars, with a top rating indicating that its shares are undervalued. In July, Lee hiked his fair value estimates for TSMC to NT$1,800 from NT$1,700, after the company raised its full-year revenue growth guidance by about 30% in U.S. dollar terms. He also raised his 2025-2029 revenue estimates by 5% and earnings per share estimates by 9% in anticipation of AI's contributions. "TSMC is undervalued as the market is overestimating tariff effects and underestimating the longevity of AI investments," he wrote in a July note. -- CNBC's Dylan Butts contributed to this report.

This Underrated AI Stock Has Zero Hype and Massive Free Cash Flow | The Motley Fool

However, all these chipmakers hand their designs to TSMC for large-scale manufacturing, turning them into real products. That's why it's not only one of the best, but one of the safest ways to invest in the AI infrastructure buildout. It wins no matter which chip designer takes the lead, and it's generating a ton of cash doing it. Even Nvidia's CEO Jensen Huang went out of his way to praise the company. He called TSMC "one of the greatest companies in the history of humanity," adding that "anybody who wants to buy TSMC stock is a very smart person." That is not the kind of praise Huang throws around lightly. TSMC is the top foundry in the world, producing most of the world's advanced chips. Rival Intel (INTC 2.20%) has been trying to build its own foundry business, but it is losing money and hasn't been able to gain any ground. In fact, the U.S. government recently made a large investment in the struggling company, reportedly to help bolster it. Samsung, meanwhile, has struggled with production yields. It also recently lost one of its advanced chip designs, as Alphabet switched to TSMC for its Tensor G5 chip used in its Pixel smartphones. Neither Intel nor Samsung has shown that they can match the scale or reliability of TSMC. That's why TSMC has locked in almost every large AI chipmaker as a customer. Chip designers are constantly looking to shrink node sizes, and TSMC is the only foundry that has shown it can consistently produce advanced nodes with strong yields. Nodes are a reference to the size of the transistors used on a chip, measured in nanometers. With smaller nodes, more transistors can be packed onto the chip, which improves performance and power efficiency. Smaller nodes are becoming an increasingly larger part of TSMC's mix. Chips built on 7-nanometer or smaller nodes are already nearly three-quarters of TSMC's revenue, while its 3nm chips alone are almost one-quarter. Meanwhile, it is already preparing to move into 2nm. One of the most overlooked parts of TSMC's story is its cash generation. In 2024, it produced more than $26.5 billion in free cash flow. That was after spending heavily on building new fabs. So far this year, it's already generated over $15 billion in free cash flow despite continued heavy capex spending. It's also paying a growing dividend off that mountain of cash. Most people think of foundries as low gross margin businesses; however, TSMC is changing that narrative. Its leadership in advanced nodes has given it strong pricing power over the years. Nobody else can deliver chips at the same density and yield, so customers are willing to pay up. That's why its margins have stayed strong and have been increasing. Investors don't talk about TSMC with the same excitement they talk about Nvidia or AMD. That could be because it's not a brand consumers recognize, or perhaps because the foundry business isn't just quite as exciting. It's also not a U.S.-based company, with its headquarters in Taiwan. However, TSMC has been one of the biggest beneficiaries of the AI buildout, and it should continue to be a big winner moving forward. Last quarter, its revenue climbed 44% to $30 billion, while its profits soared. Meanwhile, management expects AI chip demand to grow more than 40% annually through 2028. The company is working closely with its largest customers to increase capacity, so it should have good visibility into this growth. Overall, TSMC is one of the most important companies in the AI supply chain. Without it, the current AI infrastructure buildout wouldn't be possible. It's growing rapidly, expanding margins, and generating a boatload of cash. Despite that, the stock is one of the most attractively valued AI plays in the market, trading at a forward price-to-earnings (P/E) ratio of 24.5 times based on analysts' 2025 estimates and a price/earnings-to-growth ratio (PEG) of less than 0.65. Stocks with PEG ratios below 1 are generally considered undervalued. Investors would be smart to heed Jensen Huang's advice and be a buyer of TSMC.

Billionaire Stanley Druckenmiller Sold His Fund's Stakes in Nvidia and Palantir, and Has Piled Into This Essential Artificial Intelligence (AI) Stock Instead | The Motley Fool

Duquesne's billionaire boss completely jettisoned Wall Street's two hottest AI stocks in favor of a trillion-dollar artificial intelligence business that's notably cheaper. The month of August has been chock-full of important data releases. The inflation and jobs report from the federal government, Federal Reserve Chair Jerome Powell's highly anticipated speech at Jackson Hole, and earnings releases from many of Wall Street's most influential businesses have deluged investors with information. It's also made it easy for something of importance to slip through the cracks. For instance, Aug. 14 marked the deadline for institutional investors with at least $100 million in assets under management (AUM) to file Form 13F with U.S. regulators. A 13F offers a concise snapshot of which stocks Wall Street's shrewdest money managers bought and sold in the latest quarter (in this case, the quarter ended June 30). Although billionaire Warren Buffett has earned quite the following on Wall Street, he's not the only billionaire fund manager with a keen eye for value. Duquesne Family Office's billionaire boss Stanley Druckenmiller is also known for his outsize returns and ability to snag amazing deals. What's particularly interesting about Druckenmiller has been his trading activity within the artificial intelligence (AI) space. Over the previous year, based on 13F filings covering trading activity from July 1, 2024 to June 30, 2025, Duquesne's investment guru sent Wall Street's two top-tier AI stocks, Nvidia (NVDA 1.10%) and Palantir Technologies (PLTR -0.98%), to the chopping block. But at the same time, he purchased shares of an essential AI titan for four consecutive quarters and made it a top-five holding. As of the midpoint of 2024, Duquesne's billionaire chief was overseeing $2.9 billion in AUM spread across 64 holdings. This included 214,060 shares of Nvidia, following its 10-for-1 forward split in June 2024, as well as 769,965 shares of Palantir. By March 31, 2025, both of these holdings were completely exited. The logical explanation for selling two of the hottest AI stocks on the planet is that Druckenmiller was locking in gains. The average stock for Duquesne Family Office has been held for less than seven months, which suggests its billionaire investor isn't afraid to cash in his fund's chips when the opportunity presents itself. Shares of Nvidia have catapulted higher by roughly 1,120% since the end of 2022, as of the closing bell on Aug. 22. Its AI-graphics processing units (GPUs) have become the preferred choice by businesses to deploy in their AI-accelerated data centers. Strong ongoing demand for AI-GPUs, coupled with Nvidia's well-defined compute advantages, have allowed it to charge a premium for its hardware. Meanwhile, Palantir's stock has gained well over 2,300% during the same time frame. Its AI and machine learning-fueled Gotham platform, which assists federal governments with military mission planning and oversight, has done a lot of the heavy lifting. With no clear one-for-one replacement for Gotham, and no true competition to its enterprise subscription Foundry platform at scale, Palantir has commanded quite the valuation premium. What might be of concern to Nvidia and Palantir shareholders is if Druckenmiller sent these stocks packing for reasons that go beyond profit-taking. As an example, Druckenmiller opined in May 2024 that "AI might be a little overhyped now, but under-hyped long term." Duquesne's billionaire boss astutely recognizes that every next-big-thing trend over the last 30 years has endured an eventual bubble-bursting event early in its expansion phase. In other words, investors have a propensity to overshoot when it comes to early utility and adoption rate expectations. This eventually leads to lofty expectations that aren't met and the bursting of the bubble. No company has benefited more from the AI revolution than Nvidia. If a bubble were to form and burst, there's little question its shares would feel the impact. Though Palantir's multiyear government contracts and subscription revenue would protect it from an immediate revenue drop-off, poor investor sentiment during a bubble-bursting event would still, likely, weigh on its shares. Valuation is another catalyst that may have enticed Druckenmiller to sell. Nvidia and Palantir are trading at respective price-to-sales (P/S) ratios of 30 and 117. Historically, businesses on the front line of a game-changing innovation have peaked at P/S ratios of 30 to 40. In short, Nvidia and Palantir are priced for perfection. Although Druckenmiller remains skeptical of some of the companies leading the evolution of AI over the short run, there is one essential artificial intelligence stock that he simply can't stop buying for his fund. Duquesne's 13Fs show buying activity spanning four consecutive quarters for trillion-dollar chip fabricator Taiwan Semiconductor Manufacturing (TSM 1.09%), which is best-known by its abbreviation, "TSMC." Here's a breakdown of Druckenmiller's buying activity of TSMC over the previous year: In just one year, TSMC has become a top-five holding for Duquesne's now greater-than-$4 billion investment portfolio. The obvious allure of Taiwan Semiconductor is the role it's playing in AI chip manufacturing. Its chip-on-wafer-on-substrate (CoWoS) technology is essential for the packaging of high-bandwidth memory needed for AI-accelerated data centers. TSMC's monthly CoWoS capacity is expected to effectively double to between 65,000 units to 75,000 units by the end of 2025 from 35,000 per month in 2024. Further expansion is expected to 100,000 monthly units come 2026. This added capacity will help Nvidia, Advanced Micro Devices, and other chipmakers ramp up sales of their AI GPUs. To build on the above, TSMC is dealing with quite the backlog for its services, with some orders stretching well into 2026. Backlogged orders provide a healthy level of operating cash flow predictability. While advanced chips accounted for 60% of TSMC's net sales during the June-ended quarter, there's still plenty of opportunity outside of the AI arena. More than a quarter of its net sales trace back to chips and solutions used in next-generation smartphones. The proliferation of 5G wireless networks has led to a steady smartphone upgrade cycle. Another 10% (combined) of Taiwan Semiconductor's net sales derive from Internet of Things devices and chips used in automobiles. Vehicles and household appliances becoming more reliant on technology is excellent news for TSMC. Duquesne's billionaire chief might also be attracted by TSMC's valuation. Though its forward-year price-to-earnings (P/E) ratio of 21 represents a modest premium compared to recent years, TSMC's annual earnings growth rate of 20% or greater makes its forward P/E quite palatable.