Taiwan Semiconductor is set to benefit massively from AI tailwinds.
Taiwan Semiconductor (TSM 4.13%) is one of the most underrated artificial intelligence (AI) investments. TSMC is the world’s leading semiconductor foundry and fabricates chips for the most technologically advanced devices.
Regardless of who wins the AI race, Taiwan Semi will benefit massively, which is why the stock is such a good investment.
Taiwan Semiconductor’s technology is impressive
Taiwan Semi gives its clients access to the world’s most advanced chipmaking technology. Right now, TSMC’s most powerful chip has electrical traces spaced 3 nanometers (nm) apart. However, next-generation 2nm chips are already in development and offer a promising efficiency boost over previous generations.
These technologies can be used to design chips for smartphones, graphics processing units (GPUs), or any other device that requires extreme computing power.
So, if one smartphone company dominates another or a particular generative AI model outperforms and becomes the go-to model for all users, Taiwan Semi will still benefit. This neutral position is rare in investing, but it makes Taiwan Semi one of the best investments.
This position is working out well for TSMC, and management has made some bold predictions because of it.
Future growth is expected to be strong
In 2022, management laid out its long-term growth projection for the company. Although it didn’t put a specific end date on it, TSMC expects to grow revenue at a compounded annual growth rate (CAGR) of between 15% and 20% for the next “several” years.
AI revenue is expected to be its fastest-growing segment, boosting this growth. Management expects this division to grow at a 50% CAGR for the next five years, when it will make up about a tenth of the company’s overall business.
That’s huge growth from an emerging segment and shows how TSMC is affected by the massive AI demand wave.
There are many growth tailwinds blowing in TSMC’s favor, yet the stock doesn’t carry as much of a premium price tag as you’d expect.
Taiwan Semiconductor’s stock isn’t cheap, but it’s not expensive, either
At nearly 27 times forward earnings, TSMC stock isn’t really that cheap.
TSM PE Ratio (Forward) data by YCharts.
However, the price tag makes more sense when you consider that TSMC pays a nice 1.4% dividend and is slated to grow at an above-market pace. Furthermore, when stalwarts like Walmart (31.9 times forward earnings) and Coca-Cola (24.7 times forward earnings) trade at around the same price as TSMC, it’s clear that you’re not paying that much of a premium to own a best-in-class business.
With the broader market (measured by the S&P 500) trading at 22.7 times forward earnings, I’d say the premium that TSMC fetches due to faster-than-market growth and business prospects is earned.
Wall Street analysts also agree that the stock has a fairly strong upside. With an average one-year price target of $206, that indicates the stock has about 17% upside in the next year. While this shouldn’t be the final factor in deciding whether to buy the stock, it is nice to know that analysts are expecting solid stock performance as well.
Taiwan Semiconductor is a great stock to buy now and stash away. The trend of more calculation-intense technologies isn’t going away, and TSMC stands to benefit as a result.
Keithen Drury has positions in Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Taiwan Semiconductor Manufacturing and Walmart. The Motley Fool has a disclosure policy.
