- TSMC stock is down 17% from its 52-week high, but remains strongly positioned to capitalize on the AI opportunity.
- TSMC’s new 3-nanometer chip should allow for AI-related revenue growth.
- While cost pressures are undermining profit margins, the stock is worth buying at 18x forward earnings, albeit cautiously given the China-related risks.
This article discusses Taiwan Semiconductor Manufacturing Company Limited (TSMC) and its positioning in the context of the AI (Artificial Intelligence) opportunity. Here are the key points:
- Stock Performance: TSMC’s stock has experienced a 17% decline from its 52-week high reached in mid-June 2023. While it had shown strong performance earlier in the year, it has faced challenges due to weaker macroeconomic conditions.
- AI Growth: TSMC is a key supplier for Nvidia, and investors are looking for AI-related growth from the company. However, the CEO, C. C. Wei, mentioned on the last earnings call that while there is increased AI-related demand, it is not enough to offset the cyclicality in the business.
- AI Revenue Potential: TSMC is focusing on AI-driven business, particularly in data centers. Currently, server AI processors make up around 6% of the company’s revenue, but TSMC anticipates this to grow at a 50% CAGR (Compound Annual Growth Rate) over the next 5 years.
- 3-Nanometer Technology: TSMC is ramping up its 3-nanometer technology node, which is crucial for AI applications. This technology is expected to support AI-related revenue growth.
- Risks and Competition: TSMC faces challenges in meeting the growing demand for AI chips, especially on the back-end manufacturing side. Intel is also making efforts to compete in the AI chip manufacturing market, aiming to leverage its advanced packaging technology.
- Diversification and China Risk: Customers may diversify their supplier base to reduce dependency on TSMC, and geopolitical tensions between Taiwan and China are contributing to this diversification. TSMC has started building foundries overseas to mitigate these risks.
- Financials and Valuation: TSMC’s gross profit margin has faced challenges due to weaker demand and higher costs. The company aims for a 53% gross margin over the long term. Despite risks, Nexus Research believes TSMC is worth buying at around 18x forward earnings, given its exposure to the AI revolution and a reasonable valuation.
In conclusion, TSMC is positioned to benefit from the AI revolution, particularly with its 3-nanometer technology. However, it faces challenges in meeting demand, increasing competition, and geopolitical risks. Investors are advised to approach the stock cautiously but consider its long-term potential.
