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Earlier this week, CNBC reported that artificial intelligence (AI) chip startup Cerebras Systems will soon list on the equity markets via an initial public offering (IPO). Cerebras competes with AI darling and market bellwether Nvidia (NVDA), whose graphics processing units (GPUs) are used to train and run generative AI models such as ChatGPT. According to Cerebras, its WSE-3 chip is armed with additional cores and memory compared to Nvidia’s H100 chip.
The AI megatrend has allowed Cerebras to increase its revenue to $66.6 million in the first six months of 2024, up from just $8.7 million in the year-ago period. While the company remains unprofitable, its net losses have narrowed to $66.6 million in the last two quarters, compared to a loss of $77.8 million last year. In 2023, it reported revenue of $78.7 million and a net loss of $127.2 million, while its sales stood at $69.8 million and a net loss of $50.9 million in Q2 of 2024. Cerebras explained that its operating expenses have risen in 2024 due to a widening employee base, which is, in turn, supporting its robust revenue growth.
The AI chip market is growing at a rapid pace, as Big Tech companies are investing heavily to gain an early mover advantage in this segment. Moreover, public cloud giants such as Amazon (AMZN), Microsoft (MSFT), and Google (GOOG) (GOOGL) are developing their own AI chips to save costs and reduce dependency on other chip makers. Notably, UAE-based Group 42 is Cerebras's largest customer, and accounted for 83% of total sales in 2023.
Like many other semiconductor companies, Cerebras has outsourced its chip manufacturing process to Taiwan Semiconductor Manufacturing (TSM). In fact, Taiwan Semiconductor is the world’s largest chip foundry, and is poised to benefit from the AI boom in the upcoming decade. Let’s see how.
The Bull Case for Taiwan Semiconductor Stock
Taiwan Semiconductor, valued at $892 billion by market cap, manufactures, packages, tests, and sells integrated circuits (ICs) and other semiconductor devices. The company has increased its sales from $35.7 billion in 2019 to $76.4 billion in the last 12 months.
In Q2 of 2024, TSM's revenue grew by 10.3% year over year due to strong demand for its 3-nm (nanometer) and 5-nm technologies, which was partially offset by softer seasonality in the smartphone business.
Taiwan Semiconductor is highly profitable, and its gross margin increased by 10 basis points to 53.2% in Q2. Its operating margin in the June quarter rose by 50 basis points to 42.5%, making TSM one of the most profitable tech stocks on the planet.
Management expects its AI-related chip sales to grow at a compounded annual growth rate (CAGR) of 50% through 2028, and account for almost a fifth of total sales. The AI tailwind will also enable the company to grow revenue at a CAGR of 15% and 20% in the next few years. TSM’s strong revenue growth and focus on operational efficiency should help it grow earnings and cash flow at a steady pace, which would support consistent dividend hikes.
TSM pays shareholders an annualized dividend of $2.48 per share, indicating a forward yield of 1.43%. Given its outstanding share count, TSM’s annual dividend payment is around $12.5 billion. In the last 12 months, TSM’s free cash flow totaled $22.5 billion, indicating a payout ratio of less than 60%.
In the last 10 years, TSM has increased its dividend payout by more than 400%, enhancing the yield-at-cost over time.
What's the Forecast for TSM Stock?
Analysts are bullish on TSM, which has a consensus “strong buy” rating. Out of the 10 analysts tracking TSM stock, eight recommend “strong buy,” one recommends “moderate buy,” and one recommends “hold.”
The average 12-month target price for TSM stock is $204.71, about 19% above the current trading price.
Wall Street expects TSM to grow its adjusted earnings from $5.19 per share in 2023 to $6.57 per share in 2024, with continued growth to $8.27 per share in 2025. TSM stock is currently priced at 33x trailing earnings. If its trailing P/E multiple is still around 33x, it will trade at $275 per share in 2026, indicating an upside potential of over 60% from current levels.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
