TSM Stock: Picks-and-Shovels AI Play with High Upside
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TSM Stock: Picks-and-Shovels AI Play with High Upside

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Taiwan Semiconductor is a one of the rare investment opportunities that both value investors and AI enthusiasts can get behind.

Semiconductor stocks are near all-time highs based on investor excitement surrounding AI technology, and Taiwan Semiconductor (NYSE:TSM) is a picks-and-shovels play on the entire space with considerable potential upside ahead of it. I’m bullish on shares of the world’s largest dedicated chipmaker based on its importance to the semiconductor value chain, its long-term growth potential, and its surprisingly palatable valuation.

The Picks-and-Shovels Play in the AI Gold Rush

Semiconductor companies like Nvidia (NASDAQ:NVDA), Advanced Micro Devices (NASDAQ:AMD), and Marvell Technology (NASDAQ:MRVL) are developing the chips that make generative AI possible and power apps like ChatGPT and the Dall-E image generator that are propelling the AI revolution.

As the world’s largest dedicated chip manufacturer (with a dominant market share of nearly 60%), the great thing about Taiwan Semiconductor is that while these companies jostle for market position and compete to establish leadership in this nascent field, Taiwan Semiconductor counts them all as customers and manufactures chips for all of them, meaning that it gives you exposure to the whole space without having to pick winners and losers.

Furthermore, Taiwan Semiconductor has a formidable moat around its business as semiconductor manufacturing demands serious technological acumen and capital investment, especially when it comes to the newest, most technologically-advanced chips, like those used in generative AI.

Only a handful of companies in the world have the capability to manufacture the most cutting-edge semiconductors, and Taiwan Semiconductor has a dominant position in this market. Newer competitors face considerable barriers to entry in terms of cost and engineering expertise, confining many of them to the lower end of the market.

And while AI chips have captured the market’s imagination, it’s important to remember that Taiwan Semiconductor also manufactures semiconductors for plenty of other exciting, high-growth end markets, including high-powered computing, the automotive market, Internet-of-Things (IoT) devices, smartphones, and more. Outside of AI, Taiwan Semiconductor counts other leading semiconductor companies like Qualcomm (NASDAQ:QCOM) and tech giants like Apple (NASDAQ:AAPL) and Sony (NYSE:SONY) as customers.

Considerable Growth Ahead

Taiwan Semiconductor’s management forecasts considerable growth ahead for the foreseeable future.

On the most recent earnings call in January, CEO C.C. Wei predicted that revenue will grow in the low-to-mid-20% range in U.S. dollar terms for 2024. Wei also said that he expects revenue to grow at a 15-20% compound annual growth rate (CAGR) over the next few years in U.S. dollar terms, which is remarkable revenue growth for a company of this size (Taiwan Semiconductor’s market cap is $657 billion, making it the 10th-largest company in the world by market valuation).

The firm recently also gave an update on revenue numbers for January. Sales were up 7.9% year-over-year and up 22.4% sequentially from December.

No Froth in TSM’s Stock Price

Here’s the best part. While TSM enjoys a dominant market position and serves the companies leading the AI revolution, it’s hard to see any froth in its shares. In fact, while the stock has gained an impressive 44.1% over the past year, it’s not even close to being overvalued. TSM trades for 20.6 times 2024 consensus earnings estimates, meaning it is actually slightly cheaper than the broader market. 

Looking out to 2025 earnings estimates, Taiwan Semiconductor is downright cheap, trading at just a paltry 16.7 times consensus earnings. There are plenty of slow-growth consumer staples stocks with lower growth prospects and lesser moats around their businesses that enjoy higher multiples than Taiwan Semiconductor.

This seems way too cheap for a company that stands as the linchpin of the supply chain for some of the world’s most important and advanced technology, making Taiwan Semiconductor the rare stock that both value investors and AI enthusiasts can wholeheartedly get behind.

Additionally, Taiwan Semiconductor is a dividend stock. While its dividend yield of 1.1% isn’t particularly notable, the dividend payout could potentially increase over time as earnings continue to grow.

A Smart Choice

Adding to the stock’s allure, Taiwan Semiconductor is also one of the few stocks that have a vaunted ‘Perfect 10’ Smart Score from TipRanks. The Smart Score is a proprietary quantitative stock scoring system created by TipRanks. It gives stocks a score from 1 to 10 based on eight market key factors. A score of 8 or above is equivalent to an Outperform rating.

Is TSM Stock a Buy, According to Analysts?

Turning to Wall Street, TSM earns a Strong Buy consensus rating based on five Buys, zero Holds, and zero Sell ratings assigned in the past three months. The average TSM stock price target of $140.60 implies 11% upside potential from current levels.

Investor Takeaway

In conclusion, Taiwan Semiconductor is a dominant company with considerable barriers to entry around its business, serving some of the world’s most innovative companies, ranging from Apple to Nvidia. The company’s growth prospects look bright for the foreseeable future, with revenue expected to grow at an impressive 15-20% CAGR over the next few years.

Despite this, shares of Taiwan Semiconductor are surprisingly cheap, making the stock an attractive value proposition. 



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