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Tech giant Nvidia (NVDA) made headlines with its recent third-quarter results, driven by strong demand for artificial intelligence (AI) chips. While NVDA stock has largely sagged since the report, analysts called the quarterly results a win not just for Nvidia, but for companies throughout the AI data center ecosystem.
One name in particular that should benefit from continued surging demand for AI chips is Taiwan Semiconductor (TSM), the foundry giant that allows Nvidia to maintain its fabless business model.
"The results underscore robust structural Al demand, with limited digestion periods as adoption accelerates," wrote Bank of America analyst Brad Lin in a post-earnings note to clients. “NVIDIA's intact one-year cadence for datacenter GPU development is particularly favorable for TSMC, supporting [average selling price] content growth. The continuous scaling of Al models strengthens TSMC's leading-edge node demand and industry leadership.”
Here's a closer look at this critical contributor to the AI semiconductor supply chain.
About TSM Stock
Valued at $939.7 billion, Taiwan Semiconductor Manufacturing Company (TSM) is the world's largest contract chip manufacturer, with a position at the heart of the global semiconductor supply chain. TSM has attracted significant attention from investors amid the AI boom, thanks to its crucial role in producing chips for AI applications.
TSM’s advanced products, such as its CoWoS (Chip-on-Wafer-on-Substrate) packaging and its 3nm technology, position it at the forefront of industry innovations. CEO C.C. Wei recently expressed optimism about the transformative impact of AI on global industries, estimating a $31 million productivity impact from the technology.
After reaching a trillion-dollar market cap at its October highs, TSM has pulled back about 14%, presenting an opportunity to buy the dip. Overall, TSM is up nearly 75% year-to-date, easily outpacing the iShares Semiconductor ETF's (SOXX) gain of 11.2%.
Taiwan Semi Tops Q3 Earnings
On Oct. 17, shares of the Nvidia partner jumped 9.7% after Taiwan Semiconductor reported better-than-expected results for the third quarter.
Q3 net revenue climbed 36% year-over-year to $23.50 billion, while earnings per share (EPS) improved to $1.94. High Performance Computing rose to account for 51% of net revenue, compared to 42% last year. Advanced technologies, which encompasses 7-nanometer and beyond, accounted for 69% of total wafer revenue.
“Our business was supported by strong smartphone and AI-related demand for our industry-leading 3nm and 5nm technologies,” said CEO Wei, adding that “almost every AI innovator is working with TSMC.”
TSM guided for fourth-quarter revenue of $26.1 billion to $26.9 billion, which topped the consensus forecast of $25.02 billion. Full-year revenue is expected to rise 30% on a year-over-year basis.
Drilling down, server AI processor revenue is expected to more than triple this year to represent a mid-teens percentage of total revenue, per Wei. The company's first Arizona-based foundry is set for production in 2025, with two more set to begin volume production by the end of the decade.
TSM is a Dividend Stock, Too
Along with the AI growth story, TSM's dividend history also appeals to income-focused investors. The company has paid dividends for 19 years, with a current quarterly payout of $0.69. That translates to a yield of 1.28% at current levels.
Plus, Taiwan Semi stock looks reasonably valued, especially given its prime position in the AI semiconductor supply chain. The stock is priced at 25.68 times forward adjusted earnings, which is right in line with the tech sector median - while its multiple of 16.77 times forward cash flow is a healthy discount to the 22.61 sector median. While the stock isn't cheap at these prices, the multiples suggest that Wall Street might be overlooking TSM's prime foothold in this high-growth industry.
What Do Analysts Say About Taiwan Semiconductor Stock?
Bank of America isn't the only brokerage firm with a bullish view on TSM stock. The consensus among 10 analysts in coverage is a “Strong Buy,” with only one tepid “Hold” rating on the equity.
The average 12-month price target for TSM is $226.14, suggesting expected upside potential of about 22.6% from current levels.
