8. Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM)
Number of Hedge Fund Shareholders In Q1 2024: 135
Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) is the world’s largest contract chip manufacturer. This places it right at the heart of the AI hardware supply chain as leading players like NVIDIA rely on it to make their products. HSBC is also aware of this, as in a May 2024 analyst note the bank raised Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM)’s share price target to NT$1,025 from NT$993 and kept a Buy rating for the shares. HSBC increased Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM)’s 2024 EPS forecast by 3.5%, and added that the firm’s advanced 3-nanometer process technology positions it well in the industry.
Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM)’s larger peer Intel has a forward P/E of 28.90, and the Taiwanese firm is at level with this due to its ratio of 28.17. This shows that the market expects both firms to grow evenly in the future. Third Point Management mentioned Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) in its Q1 2024 investor letter. Here is what the firm said:
Today, TSMC derives a relatively small percentage of its revenues from AI processors, largely from NVDA, but we see that percentage quickly rising as AI compute broadens from just the GPU to custom accelerators. With Nvidia’s GPUs costing tens of thousands of dollars, the bulk of which go to Nvidia’s gross profit, hyperscalers are doubling down on their efforts to develop in-house silicon to alleviate AI compute’s economic burden. Google was the first mover to custom accelerators with the TPU almost 10 years ago, and today this is already a multi-billion dollar business for TSMC. Amazon, Microsoft, and Meta have all followed Google’s lead and have announced (and in Amazon’s case already mass producing) their own chips. As these products scale, we see TSMC’s AI revenue growing by multiples in the coming years.
While TSMC’s fundamental outlook looks bright, the market has concerns which are reflected in the stock’s 10x+ discount to the SOX, the widest in TSMC’s history. The main concern is Intel’s entry into the foundry market. While we commend Intel’s efforts to diversify the global semiconductor supply chain and have admiration for the company’s rich IP and manufacturing expertise, we think it will be difficult for Intel to challenge TSMC’s dominance in foundry. Putting aside the onerous capital requirements necessary to stand up a foundry business (TSMC’s capital budget stands at ~2x Intel’s projected EBITDA), we believe the transition from internal manufacturing to an external foundry will be a difficult one. Intel has spent the past 40+ years tailoring its manufacturing process and transistor design to suit its own narrow product suite. Broadening to a multitude of customized external customer designs across a variety of end markets, in particular mobile, we believe will prove challenging.
We believe TSMC has significant untapped pricing power which can be levered to offset (if not expand) its already admirable returns on capital.
