1. Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM)
Number of Hedge Fund Holders: 158
Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM), the world’s largest dedicated semiconductor foundry, supplies chips to top technology giants like Apple, NVIDIA, and Qualcomm. With its advanced 2nm chip technology, leadership in cutting-edge nodes (3nm, 5nm, and 7nm), and strategic global expansion, TSMC is set to maintain its dominance in the semiconductor industry, particularly in AI and high-performance computing (HPC) chips.
Recently, TSMC announced plans to build two additional fabrication plants (P4 and P5) in Kaohsiung, Taiwan, bringing the region’s total to five fabs. These developments, initially revealed by the city’s mayor and detailed by Data Center Dynamics, are in the planning stages, with environmental assessments expected soon. This follows the company’s earlier initiative to construct a third 2nm fab at Kaohsiung’s Nanzih Technology Industrial Park, a 238-hectare site where work on the first fab (P1) is already underway, with mass production slated to begin next year.
TSMC delivered exceptional results in Q3, with revenue surging 39% year-over-year to approximately $23.6 billion and net income climbing 54% to around $10.1 billion. Both figures exceeded analyst expectations. The company credited this growth to rising demand for AI-related hardware and anticipates this momentum to carry through year-end.
Baron Global Advantage Fund stated the following regarding Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) in its Q3 2024 investor letter:
“We established a small position in Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM). Morris Chang founded TSMC in 1987, as the world’s first dedicated semiconductor foundry. Until then, semiconductor chips were always designed and manufactured by the same company. TSMC introduced a groundbreaking new business model, in which it acted purely as a contract manufacturer, which proved to be highly successful. TSMC maintained a focus on improving its manufacturing process technology and enabled the emergence of innovative fabless design companies, including NVIDIA, Apple, and Qualcomm, who became TSMC’s key customers. Today, TSMC has a more than 60% share of the total semiconductor foundry market and over 90% share in leading-edge manufacturing. TSMC enjoys high barriers to entry given the ever-increasing cost and technological complexity of semiconductor manufacturing while benefiting from economies of scope as once leading-edge manufacturing becomes lagging edge on fully depreciated equipment. TSMC also benefits from scale– higher profits lead to higher R&D and capex investments, allowing for further technological differentiation, resulting in more profits. We believe TSMC will sustain strong double-digit earnings growth for years to come, driven by continued market share gains, strong pricing power, and structural growth in AI demand. According to C.C. Wei, TSMC’s CEO, “almost all the AI innovators are working with TSMC to address the insatiable AI-related demand.”6 Management forecasts that revenue from server AI chips, such as GPUs and other AI accelerators, will grow at a 50% CAGR from 2022 to 2028 and account for more than 20% of TSMC’s revenue by 2028. We except further long-term upside from the eventual proliferation of edge AI devices, including AI smartphones and AI PCs, which will require significantly more computing power and drive even stronger demand for TSMC’s leading-edge technology.”
While we acknowledge the potential of TSM to grow, our conviction lies in the belief that certain AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than TSM but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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