By Rich Duprey, Investor Place, Trades Of The Day, 2024-06-28
If there really is a “new industrial revolution” underway, then investors will want to buy Taiwan Semiconductor Manufacturing (NYSE:TSM) now. This is the top picks-and-shovels play for AI chip stocks and it offers a compelling growth opportunity.
As the leading pure-play foundry for the semiconductor industry, Taiwan Semiconductor supplies all the major AI chipmakers including Nvidia (NASDAQ:NVDA), Advanced Micro Devices (NASDAQ:AMD) and Intel (NASDAQ:INTC) with their powerful chips.
Because AI is still in its infancy and demand from data centers and enterprise-class customers moving their data to the cloud remains white hot, Taiwan Semiconductor stock is a surefire winner now and for the foreseeable future.
During a Gold Rush, Sell Shovels
Nvidia CEO Jensen Huang told the Databricks conference earlier this month “we are at the beginning of a new industrial revolution” but one that is different from similar upheavals in the past. This time, “we're generating (artificial) intelligence.”
And the chipmaker is leading the way. Sales more than tripled in the first quarter, rising 262% to $26 billion, a record for the semiconductor stock. Yet Nvidia couldn't achieve such growth without first buying its “tools” from Taiwan Semiconductor Manufacturing.
During the Gold Rush of the late 1840s, the real winners were not those who panned for gold but rather the people who sold the miners the picks, shovels and wheelbarrows they needed.
They made money off every miner betting it all on finding a golden nugget. Levi Strauss made millions and created a clothing empire selling miners his unique riveted jeans and other tools.
Taiwan Semiconductor Manufacturing is today's Strauss selling AI miners their shovels. It produces the advanced semiconductors the industry needs to build their AI chips.
Bringing Home the Gold
TSM‘s first-quarter revenue jumped 13% year-over-year to $18.8 billion generating operating earnings of $8.5 billion, a 31% increase from last year.
Margins also improved across the board with gross margins of 53.1%, operating margins of 42% and net margins coming in at 38%. Earnings of $1.38 per share were 9% higher than the year-ago period.
The chip foundry expects revenue to grow as much as 30% to $20.4 billion in the second quarter as demand for its manufacturing remains unrelenting.
And it is not just the traditional chipmakers that Taiwan Semiconductor supplies. For example, it is also a key supplier of Apple‘s M-series chips.
While the tech giant doesn't sell its chips to others but rather uses them for its own use, it plans on making a new chip for its data centers. TSM will again be the supplier.
Mobile chipset maker Broadcom (NASDAQ:AVGO) also counts Taiwan Semiconductor as a key supplier. According to JPMorgan Chase analysts, Broadcom is now the second largest chip supplier behind Nvidia as it has branched out beyond just mobile devices into data centers and more.
Expect Surging Profits
As the equilibrium between supply and demand tilts sharply in favor of the latter, Taiwan Semiconductor Manufacturing is raising its prices. A report from Commercial Times suggests TSM will raise prices on its 3 nanometer wafer by more than 5% while advanced packaging prices are expected to rise by 10% to 20% next year.
As the foundry builds out more facilities to help meet the growth expected, those price increases will flow straight to its bottom line.
The stock trades at elevated valuations on its march toward trillion-dollar status. However, the picks-and-shovels trade makes Taiwan Semiconductor Manufacturing stock worth the premium.
— Rich Duprey
Source: Investor Place
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