We recently compiled a list of the 10 Best Growth Stocks to Buy According to Billionaire Dan Loeb and in this article we will discuss the activist investor’s position in Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM).
Billionaire investor Dan Loeb’s hedge fund Third Point had a strong start to 2024 after its offshore fund posted returns of 7.8% in the first quarter chugging along with the broader market’s 10.6% gain. AI has been one of his top investing themes for some time now and the activist shareholder maintains his bullish view on the technology. In the first quarter, he initiated a position in Alphabet and also increased his position in Amazon by 22% to about $920 million.
Loeb Thinks This Company’s Capital Allocation Strategy is “Brilliant”
Loeb’s also bullish on the energy transition and one of his favorite stocks that is expected to benefit from the AI-driven electricity demand is Vistra, one of the largest independent power producers and retail electricity providers in the US. Though the power company’s core markets have experienced volatility due to weak domestic electricity demand, its “capital allocation strategy has been brilliant”, he stated in his Q1 2024 letter to shareholders, seen by Insider Monkey. In the weak demand environment for fossil fuels, The Texas-based energy group made smart moves by shutting down its unprofitable coal plants and instead buying back 33% of its shares between 2018 and 2023. Additionally, its acquisition of nuclear generation assets of Ohio-based energy company, Energy Harbor, was right on time as governments are turning to nuclear fuel sources to meet the world’s growing energy demands. Loeb expects Vistra to be a direct beneficiary of AI-driven electricity demand and is bullish on the company’s unique position of holding both renewable and fossil fuel-based assets under its belt.
Loeb’s Bullish on LSEG, and For Good Reason
Another AI play Loeb is increasingly bullish on is UK-based stock exchange and financial data company London Stock Exchange Group. The activist investor likes the company’s unique market position as a data provider that is democratizing and making financial data accessible to consumers without the use of additional third-party software. He sees London Stock Exchange Group benefitting from generative AI as information retrieval systems in financial services become more powerful. He also expects the company to develop “a powerful Research Assistant application” with Microsoft to reduce both human resources and time needed to process financial data. He thinks London Stock Exchange Group is at the forefront of capitalizing on the transition of the financial services industry “from manual data processing via clunky desktop terminals to machine-assisted data processing”.
A close-up of a complex network of integrated circuits used in logic semiconductors.
Our Methodology
We scanned Third Point’s Q1 portfolio and picked growth stocks from the fund’s top 13F holdings. Additionally, we’ve also added overall hedge fund sentiment, as of Q1 2024. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Note: All pricing data is as of June 6.
Is This Growth Stock a Good Long Term Buy?
Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM)
Third Point’s Stake Value: $159,858,750
Number of Hedge Fund Holders: 135
Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) is one of the biggest semiconductor foundry companies in the world, providing an array of wafer fabrication processes for manufacturing next-generation semiconductors. TSM dominates the semiconductor space, holding a global market share of over 60% in semiconductor manufacturing. Today, chips power everything from your phones to your automobiles to large-scale power-hungry data centers and this company is at the center of chip manufacturing. Loeb’s position remained unchanged in Q1 2024, with the stock still accounting for 2% of Third Point’s holdings. Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) is one of his top growth stocks picks.
Third Point Management stated the following regarding Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) in its first quarter 2024 investor letter:
“During the quarter, we added to our Taiwan Semiconductor Manufacturing Company Limited(NYSE:TSM) investment, which we initiated in May of last year. TSMC is coming off its worst year since the Global Financial Crisis, and in the years to come we see a combination of cyclical recovery plus structural growth in AI demand fueling substantial earnings growth for the company.
We view TSMC as the “toll road” of the semiconductor industry, particularly for AI compute. TSMC holds more than 90% market share for leading edge semiconductor manufacturing, where all AI silicon is being processed. Beyond their reliable execution producing some of the most complex products on earth in volume, TSMC has spent decades optimizing for and building ecosystems around their 500+ customers, an advantage that cannot be replicated overnight…” (Click here to read the full text)
Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) has grown its revenue by a CAGR of 11% and net income by 12% over the past 10 years. The stock is trading at 26.5 times its forward earnings, lower than its sector median of 30x. The company has seen a surge in institutional ownership over the past quarter, with the number of hedge funds owning the stock growing to 135 from 105. Billionaire Philippe Laffont of Coatue Management grew his position by 3,210% in the quarter, amassing a stake worth $1.4 billion in the foundry operator.
Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) is an innovator and premium supplier of equipment for AI and high-performance computing, both of which are high-growth markets. It has a first-mover advantage when it comes to semiconductors, and though it has seen competition from the likes of IBM (they launched a 2nm process back in May 2021 and TSMC responded with its research report on the 1nm process), it has retained its position. The company’s client base, consisting of trillion-dollar giants Apple and Nvidia, are going to propel it to remain the world’s largest foundry company. Management expects AI processors to lead its sales in 2024 and “account for low-teens percent” of total sales, and further grow to 20% of its total revenue by 2028.
Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) expects to grow its 2024 revenue “by low to mid-20% in U.S. dollar terms”, and analysts expectations sit at 22.6%. TSM’s shares have gained nearly 62% over the past year, but how high can it go? Analysts’ median price target implies a marginal upside of 4% from current levels but the Street-high target implies a 13% upside. The stock has a “Buy” recommendation, and we agree, because it’s a monopoly holder with specialized exposure to a high-growth industry. The company is expected to benefit from the secular tailwinds of the AI sector and its strategic global expansion into the US, Japan, and Germany.
Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) ranks 8th on our list. To discover Dan Loeb’s top growth stock picks, check out our free report on the 10 Best Growth Stocks to Buy According to Billionaire Dan Loeb. While we acknowledge the potential of TSM an AI play, our conviction lies in the belief that some 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.
READ NEXT: Michael Burry Is Selling These Stocks and Jim Cramer is Recommending These Stocks.
Disclosure. None. This article is originally published on Insider Monkey.