We recently compiled a list of the 10 Best Technology Stocks to Buy for Long Term. In this article, we are going to take a look at where Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) stands against the other technology stocks.
An Analysis of the Technology Industry
The technology industry is one of the key drivers of the global economy. According to MGI research, the global technology industry was valued at $8.51 trillion in 2022 and is forecasted to grow at a compound annual rate of 7.75% to reach $11.47 trillion by 2026. In the United States alone the information technology industry drives more than one-third of the national economy.
One of the latest trends in the tech industry has been the increasing investments in artificial intelligence by both tech giants and start-up companies. According to a July 3 report by Reuters, the US venture capital funding surged to $55.6 billion during the second quarter of 2024. The funding surged more than 47% on a quarterly basis and was mainly driven by significant investments in artificial intelligence companies including $6 billion raised by Elon Musk’s xAI.
However, over the past few months, the technology sector has seen a major sell-off due to what analysts call an “AI bubble”. The sell-off initiated with investors raising concerns over return on investment regarding the premium they have been paying as capital expenditure on artificial intelligence. On August 5, CNBC reported that the “Magnificent Seven” US tech companies lost a combined $1 trillion market value at the start of the trading day. As a result, NASDAQ was down 3%, marking the index’s steepest three-week slide in two years.
We recently covered the AI tech bubble in detail in 10 Tech Stocks to Monitor Amid Market Volatility According to Bernstein Analyst. Here’s a glimpse of the article:
“In the past few weeks, a major selloff in the technology sector, mostly over concerns about return on investments amid ballooning capital expenditures on artificial intelligence (AI), has hit the stock market, sending valuations crashing and igniting fears of an AI bubble at the marketplace that might be about to burst. However, Stacy Rasgon, who has covered semiconductor stocks, one of the most prominent sectors in the AI world, for over fifteen years, has advised investors to stay the course, terming fears of a bubble as overblown. Rasgon claims that even though chances of an air pocket, used to refer to stock plunges, are 100%, he is confident the time for them is not now. He pointed to the very real and massive AI data center build as an example, predicting it would go on for a few years, helping push AI stocks higher.”
Michael Landsberg, Landsberg Bennett Private Wealth CIO appeared on a CNBC interview to talk about the AI bubble. He believes that the AI bubble hasn’t popped yet and what we saw recently was a reset of the market, where the market resets out-of-sync factors, and does not mean that the analysts are not positive about AI. He further added that a lot of AI companies have had a great past six months and are growing their earnings. He believes that ultimately earnings drive any stock and as far as AI stocks are concerned their earnings are growing and will continue to grow, thereby increasing the price.
Moreover, Steve Eisman, Neuberger Berman Senior Portfolio Manager appeared on another CNBC interview termed the recent events as a “Psychological Rotation”. He mentioned that this was not a fundamental rotation, which could have been troublesome, rather it is a psychological rotation that will not hold for long. He further mentioned that Artificial intelligence is here to stay for years and he still sees massive growth opportunities for companies investing in AI.
Our Methodology
To compile the list of 10 best technology stocks to buy for the long term we used the Finviz and Yahoo Finance stock screeners. We searched for technology stocks and sorted them based on their market capitalization. From these stocks, we selected technology stocks that have been in business for 20 years or more and are expected to stay in business for several decades. Once we had the consolidated list, we ranked the stocks that were the most widely held by institutional investors, as of Q2 2024. The list is in ascending order of the number of hedge fund holders for each stock.
Why do we care about what hedge funds do? 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).
A close-up of a complex network of integrated circuits used in logic semiconductors.
Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM)
Number of Hedge Fund Holders: 156
Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) is one of the largest chip makers in the world. It accounts for more than 60% of foundry spending in the world justifying its huge market capitalization of more than $873 billion. The company develops chips that are powerful and power efficient, with applications in market-critical areas such as AI, data centers, and smartphones.
The competitive edge of the company lies in its huge scale boosted by one of the most advanced chip-making processes and its ability to generate record revenues. The robust revenue generation capability allows the company to continue its R&D investment and keep its strategic edge up and running. Over the past 10 years Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) has grown its top line by 14% and its bottom line by 17%.
During the past month, the company achieved a new monthly record revenue of $8 billion, marking a 45% increase year-over-year. Quarterly, the FQ2 was also a success. Net revenue of the company grew 32.8% year-over-year to reach $20.82 billion, ahead of its guidance of $20.4 billion. More than two-thirds of the company’s revenue grew on the back of its advanced chip manufacturing processes.
In addition to the revenue, the gross margin was also above quarterly guidance and was recorded to be 53.2%. Looking ahead the company expects its gross margin to expand between 53.5% to 55.5% indicating strong pricing power and growing demand.
Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) has increased its capital expenditure lower-end forecast from $28 billion to $30 billion for the year. However, management has ensured that higher CapEx has always correlated with higher growth opportunities for the upcoming years.
TSM is an attractive investment opportunity for growth investors. It is trading at a slight premium of 10% to its sector, however, its earnings are expected to grow by 34% during the year to reach $1.94. Moreover, the stock was held by 156 hedge funds in Q2 2024, with total stakes worth $21.27 billion. Fisher Asset Management is the top shareholder of the company with position worth $4.93 billion.
Cooper Investors Global Equities Fund stated the following regarding Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) in its Q2 2024 investor letter:
“Unsurprisingly the portfolio’s best performers in the very short term reflect this pattern, having narrowed to those most obviously exposed to the AI story – Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) and Alphabet. While the portfolio has owned semiconductor companies for years it remains diversified and is underweight the group from an active risk perspective, dragging on relative performance in the last six months. The portfolio is currently positioned to take advantage of the Value Latency we see in smaller sized companies, and the performance of the quarter has been more aligned with those factors.
While this positioning is painful in the short-term, we see considerable embedded value in our portfolio. We also see considerable risks and uncertainties existing in the AI theme that are not reflected in the Value Latency on offer in many stocks that have surged.
Returning to the AI story, today the portfolio has around 10% of capital invested across TSMC and Alphabet. We think TSMC has a tremendous opportunity to extract more value from the profit pool currently being enjoyed by its downstream customers.”
Overall TSM ranks 7th on our list of the best technology stocks to buy for long term. While we acknowledge the potential of TSM as an investment, our conviction lies in the belief that 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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Disclosure: None. This article is originally published at Insider Monkey.
