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The recent Nvidia (NVDA) share price sell-off has turned into a serious jolt for artificial intelligence (AI) stocks more broadly. After experiencing a gravity-defying rally for nearly two years, Nvidia's record-breaking downturn has made some investors question whether the hypergrowth phase is over for the market's favorite AI stocks.
However, the fundamental data suggests that demand is firmly intact. The Semiconductor Industry Association (SIA) recently reported that sales for July were 18.7% higher year over year at $51.3 billion, with global sales expected to touch $588 billion in 2024. Notably, consulting firm McKinsey forecasts that by the end of this decade, the global semiconductor industry is poised to become a trillion-dollar market.
Given that bullish long-term forecast, the recent drawdown in leading AI semiconductor stocks may be a prime opportunity to load up on these shares at attractive prices. One critical stock that investors can consider is Taiwan Semiconductor (TSM), the Taiwanese semiconductor giant that enjoys a near-monopoly in chip manufacturing.
About Taiwan Semiconductor
Founded in 1987, Taiwan Semiconductor (TSM) is the world's largest contract semiconductor manufacturer. This means it produces chips for other companies, rather than designing and manufacturing its own. It pioneered the "fabless" model, where companies can focus on chip design and intellectual property while outsourcing manufacturing to TSM. This has helped the company grow to command a sizeable market cap of $813.3 billion.
TSM stock has had an impressive run in 2024 so far, rising 56.5%, despite hawkish comments around trade with Taiwan by Republican Presidential candidate Donald Trump. Moreover, TSM stock offers a dividend yield of 1.40%, and with a payout ratio of just 8.25%, there's room for these payouts to grow in the years ahead.
TSM is a Manufacturing Powerhouse
As AI's ubiquity is set to expand in the years to come, TSM, with its dominant market position in chip manufacturing, is uniquely well-positioned to serve this market. With a 61.7% share in chip-making, also known as fabs, it is way ahead of the second largest player (Samsung) at 11%. Moreover, TSM's customer list is top-heavy with tech giants, including Nvidia, Apple (AAPL), Qualcomm (QCOM), and MediaTek, among others.
For Apple, TSM supplies the most advanced nodes for the company's A-series chips in iPhones and M-series in Macs. And for Nvidia, it supplies fabrication services for its AI processors, H100, A100, and now the next-gen Blackwell series.
TSM's distinct expertise in the discrete semiconductor market, which has applications in smartphones in particular, should bode well. TSM's competitive advantage is in the production of advanced nodes, i.e., 3nm and 5nm. TSM's leading position in the foundry market is reinforced by its ability to produce the world’s most advanced chips, distinguished by their node size. The 3nm chips, currently the most sophisticated in production, are used primarily in iPhones and Macs for the smartphone market. Following closely behind are the 4nm and 5nm chips, which power Nvidia's AI accelerators.
As chip sizes continue to shrink, TSM is already preparing for the next leap. The company plans to begin production of ultra-advanced 1.6-nanometer chips by 2026, positioning itself to maintain its dominance in the evolving semiconductor landscape.
AI Tailwinds
Along with its commanding market share in chip manufacturing, TSM is making moves to stay ahead in the AI race. TSMC's capital expenditure plans for 2024 focus on achieving long-term growth through strategic investments in advanced tech with a range of $30-$32 billion.
Of that, 70- 80% of capex is allocated for advanced process technologies. Another 10-20% of is allocated for speciality technologies, and another 10% is assigned for advanced packaging, testing, and mask making. This configuration reflects a sharp approach to production capacity building.
Moreover, the recent acquisition of Taiwan's Innolux Corp's Tainan flat-panel display plant for $530.6 million is a strategically sound move to bolster its chip-on-wafer-on-substrate (CoWoS) capabilities. Expected to double its CoWoS capacity by the end of 2025, the expansion of CoWoS capability reflects a focused strategy to capture the market growth presented by AI and High-Performance Computing (HPC) markets that require advanced packaging solutions, while also aligning with the company's vertical integration strategy.
Solid Fundamentals
TSM's operational and execution prowess is complemented by its strong balance sheet. Over the past 10 years, the company's revenues and earnings have grown at CAGRs of 14.32% and 16.51%, respectively. Looking back over the last 16 quarters, TSM's EPS have missed analysts' consensus expectations on just one occasion.
In the most recently reported second quarter, TSM once again beat on earnings, and revenues were also stronger than expected. TSM reported revenues of $20.82 billion, up 32.8% from the prior year. Earnings rose by 30% over the same period to $1.48 per share.
The company generated net cash from operating activities of $25.52 billion for the six months ended June 30, and TSM closed the quarter with a healthy cash balance of $56.4 billion, much higher than its short-term debt levels of $4.2 billion.
TSM Stock is a Strong Buy
All things considered, analysts have deemed TSM stock a “Strong Buy,” with a mean target price of $204.71, which denotes an upside potential of about 25.7% from current levels. Out of 10 analysts covering the stock, 8 have a “Strong Buy” rating, 1 has a “Moderate Buy” rating, and 1 has a “Hold” rating.
