Tag: Taiwan Semiconductor Manufacturing Company Limited (TSM)

Geopolitical Tensions and the 'Silicon Shield': Why Taiwan Semiconductor Manufacturing Company (TSM) Remains a Tech Titan

Posted on by The INO.com Team

Taiwan's semiconductor industry sits at the crossroads of global technology and geopolitics. As the world becomes increasingly reliant on advanced chips for everything from smartphones to artificial intelligence, Taiwan Semiconductor Manufacturing Company Limited (TSM) has emerged as the critical node in this ecosystem. However, recent geopolitical tensions surrounding Taiwan, combined with rising global demand, have spotlighted TSMC's delicate yet dominant position in the technology supply chain. As nations prioritize supply chain resilience, TSMC's role becomes ever more significant—both as a technological leader and a symbol of geopolitical strategy often referred to as Taiwan's "Silicon Shield."

TSMC’s Unmatched Market Position

TSMC is the world's largest semiconductor foundry, producing chips for tech giants such as Apple Inc. (AAPL), NVIDIA Corporation (NVDA), and Advanced Micro Devices, Inc. (AMD). It controls over 60% of the global semiconductor market, a staggering figure that grows even more critical when isolating advanced chips. In the third quarter of 2024, 3-nanometer and 5-nanometer chips accounted for 52% of TSMC's wafer revenue, showcasing its dominance in cutting-edge technology. TSMC’s ability to manufacture at such precision and scale is unmatched, solidifying its position as the backbone of the modern tech world.

Demand for TSMC's chips remains robust, particularly in high-performance computing (HPC) and smartphones, which comprised 51% and 34% of its Q3 2024 revenue, respectively. The rise of artificial intelligence, driven by surging demand for GPUs and AI accelerators, has further cemented TSMC's relevance. Its advanced node technologies are essential for AI training and inference workloads, making the company indispensable to the development of generative AI models and future technological breakthroughs.

Beyond its dominance in cutting-edge technologies, TSMC's ability to attract customers across sectors—from automotive to IoT—positions it as a diversified yet focused enterprise. Its broad customer base mitigates the risk of over-reliance on any single industry, contributing to its financial stability and competitive advantage.

The Geopolitical Pressures: Risk and Opportunity

The geopolitical backdrop for TSMC has grown increasingly complex. Tensions between China and Taiwan raise concerns about potential disruptions in the global chip supply chain. Given Taiwan's strategic importance—producing more than 90% of the world’s most advanced chips—the consequences of any disruption would ripple across industries worldwide. As semiconductors underpin critical sectors like defense, healthcare, and energy, the global economy's reliance on TSMC underscores Taiwan’s geopolitical significance.

In response, both the United States and Europe have made semiconductor self-sufficiency a strategic priority. The U.S. CHIPS Act, providing subsidies and incentives for domestic chip production, reflects these efforts to reduce dependency on Taiwan. Yet, despite global efforts, replicating TSMC's scale and expertise remains a colossal challenge. Establishing semiconductor fabs demands years of investment, advanced engineering capabilities, and skilled labor—areas where TSMC already holds an intractable lead.

The geopolitical tensions also create opportunities for TSMC. As nations prioritize securing semiconductor supply chains, TSMC’s technological edge positions it as the go-to partner for governments and corporations alike. Its unparalleled expertise allows it to extract significant value while collaborating with international stakeholders to ensure stability in chip production.

Diversifying Away from Geopolitical Hotspots

To address geopolitical uncertainty, TSMC has embarked on a strategy to diversify its manufacturing locations. Projects in the United States, Japan, and Germany are part of this effort to ensure operational continuity while addressing concerns about geographic concentration.

In Arizona, TSMC’s investment in a multi-fab project marks a significant step toward global expansion. Its first fab, focusing on 4-nanometer technology, is set to begin production in early 2025. This is part of a larger initiative that will eventually include 3-nanometer production, bolstering TSMC’s ability to serve American customers. Meanwhile, in Japan, TSMC’s facility in Kumamoto started volume production in Q3 2024, targeting specialty technologies crucial for automotive and industrial applications. Land preparation for a second Kumamoto fab is underway, with production expected by 2027.

Europe has also become a focal point in TSMC's diversification strategy. A fab in Dresden, Germany, is under construction and will cater to automotive and industrial chip demand. While overseas fabs come with higher costs—including labor, energy, and material expenses—TSMC’s leadership believes these investments will enhance its long-term resilience. To offset higher costs, TSMC relies on its technological leadership and economies of scale, ensuring that its operations remain efficient and cost-effective compared to competitors.

Financial Performance: A Testament to Strength

TSMC's recent financial results underscore its operational excellence and growth potential. In Q3 2024, TSMC reported revenue of NT$759.7 billion ($23.5 billion), a 39% year-over-year increase. Net income rose to NT$325.3 billion, up 54.2% year-over-year, with a net profit margin of 42.8%. These figures reflect robust demand for TSMC's advanced process technologies, particularly 3nm and 5nm chips, as well as the company’s ability to optimize costs and increase capacity utilization.

The company’s financial outlook for Q4 2024 remains strong, with projected revenue between $26.1 billion and $26.9 billion and a gross profit margin between 57% and 59%. TSMC’s annualized return on equity (ROE) reached 33.4% in Q3 2024, highlighting its ability to generate substantial value for shareholders. While overseas expansion will temporarily dilute gross margins by 2-3%, TSMC’s consistent cash flow generation and disciplined capital allocation ensure it remains on solid financial footing.

Capital expenditure for 2024 is expected to exceed $30 billion, with 70-80% allocated to advanced technologies. This level of investment highlights TSMC’s commitment to maintaining its technological edge in an increasingly competitive landscape. By reinvesting profits into research, development, and capacity, TSMC ensures it remains ahead of competitors in delivering next-generation semiconductor technologies.

Investment Perspective: The Case for TSMC

Despite geopolitical concerns, TSMC's leadership in semiconductor manufacturing makes it a compelling investment opportunity. The growing demand for AI, smartphones, and high-performance computing ensures long-term growth for the company. Additionally, its proactive approach to diversifying manufacturing locations reduces exposure to geopolitical risks. The strategic balance between overseas expansion and technological innovation reinforces TSMC’s ability to navigate challenges while capitalizing on opportunities.

For investors, TSMC offers strong financial performance, robust demand outlook, and strategic positioning in a world increasingly dependent on advanced semiconductors. While geopolitical tensions pose risks, TSMC's dominance in leading-edge chip production and its global diversification efforts make it a resilient tech titan in uncertain times. With record-breaking earnings, solid margins, and a promising future driven by AI and advanced technologies, TSMC remains a cornerstone investment for those seeking exposure to the semiconductor industry’s exponential growth.

How China’s Stimulus Could Affect Tech Stocks Globally

Posted on by The INO.com Team

After months of sluggish economic growth and fears of missing its growth targets, China has unveiled a sweeping set of stimulus measures aimed at reviving its economy. These policies included cuts to interest rates, loans to investors and companies for stock buybacks, and promises of substantial fiscal support. The People’s Bank of China’s (PBOC) coordinated efforts are aimed at reducing borrowing costs and boosting confidence in an economy struggling with issues like the ongoing property crisis and high youth unemployment.

Despite some analysts questioning the long-term sustainability of the stimulus, the market has responded with enthusiasm. Mainland China's CSI 300 Index surged 8.5%, marking its best performance since 2008, while Hong Kong's Hang Seng Index rose by 4.2%.

As these aggressive policies aim to jump-start the struggling economy, the impact could reach far beyond China's borders, with global tech stocks poised to benefit significantly. Companies like Apple Inc. (AAPL), NVIDIA Corporation (NVDA), Taiwan Semiconductor Manufacturing Company Limited (TSM), and QUALCOMM Incorporated (QCOM) rely on China not only for manufacturing but also as a major consumer market. With lower interest rates and improved liquidity in China, demand for tech products could surge, directly benefiting these tech giants.

Furthermore, the PBOC’s promise of potential fiscal stimulus adds another layer of optimism. If China follows through on its hints of trillion yuan-level spending, particularly in infrastructure and technology sectors, it could further boost global tech companies that provide critical components for these developments.

Many are drawing parallels to 2008 when China’s swift and massive stimulus response to the global financial crisis jump-started not only its economy but also helped boost global demand. However, that stimulus left China with long-term challenges, including local government debt, overcapacity, and excess housing.

While some investors remain cautious after past false starts, the current stimulus package has injected new optimism into the market. Tech stocks, in particular, offer an attractive opportunity as lower interest rates make them more appealing for investors seeking higher returns. Therefore, fundamentally sound stocks like AAPL, NVDA, TSM, and QCOM could be worth considering for those looking to tap into the potential upside driven by China’s recovery efforts.

Stock to Hold:

Apple Inc. (AAPL)

With China being one of Apple's largest markets for premium tech products, the country’s economic recovery could stimulate demand for iPhones, MacBooks, and other high-end devices. Lower interest rates and improved liquidity might encourage consumers to invest in Apple’s premium offerings, further driving the company's revenue in this region.

For the third quarter of fiscal 2024, which ended June 29, 2024, AAPL’s total net sales increased 4.9% year-over-year to $85.78 billion, with $14.73 billion in sales from Greater China. Its gross margin rose 8.9% from the year-ago value to $39.68 billion, while its operating income came in at $25.35 billion, up 10.2% year-over-year. On the bottom line, AAPL’s net income and EPS amounted to $21.45 billion and $1.40, representing increases of 7.9% and 11.1%, respectively, from the prior year’s quarter.

Street expects AAPL’s revenue for the current year (ended September 2024) to increase marginally from the prior year to $390.52 billion, while its EPS is expected to grow by 9.2% year-over-year to $6.69. For the fiscal year 2025, both revenue and EPS are anticipated to reach $419.84 billion and $7.41, indicating a 7.5% and 10.7% year-over-year growth, respectively.

Shares of the dominant tech player have surged more than 36% over the past year and approximately 21% year-to-date. Also, its 12-month price target of $248.07 reflects a 6.5% potential upside.

However, while the outlook is promising, investors should remain cautious of geopolitical tensions that could affect production and sales. Ongoing U.S.-China trade disputes may disrupt Apple’s supply chain, leading to increased costs or delays. As Apple relies heavily on Chinese manufacturing, any escalation in tensions could pose risks to its market performance.

Stocks to Buy:

NVIDIA Corporation (NVDA)

With the frenzy around Artificial intelligence (AI) in the stock market, the AI darling Nvidia has been on an impressive run this year. The stock has surged over 145% year-to-date and nearly 179% in the past 12 months, thanks to the robust demand for its graphics processing units (GPUs), which help run and train AI algorithms.

Nvidia’s revenue for the second quarter that ended July 28, 2024, increased 122% year-over-year to $30.04 billion and exceeded the analysts’ expectations of $28.75 billion. The company's bottom line also remained buoyant, with operating income surging 174% from the year-ago value to $18.64 billion. NVDA’s non-GAAP net income amounted to $16.95 billion or $0.68 per share, compared to $6.74 billion or $0.27 per share in the previous year’s quarter, respectively.

Moreover, analysts remain bullish on the chipmaker’s long-term prospects. For the fiscal year ending January 2025, NVDA’s revenue and EPS are expected to grow by 106.1% and 119.2% from the prior year to $125.54 billion and $2.84, respectively.

Furthermore, out of 42 analysts that rated NVDA, 39 rated it Buy, while three rated it Hold. The 12-month median price target of $152.44 indicates a 25.5% upside potential from the last closing price. As China accelerates its focus on artificial intelligence (AI) and high-performance computing, this stock could boost your portfolio returns significantly.

Taiwan Semiconductor Manufacturing Company Limited (TSM)

As China's tech sector surges, demand for semiconductors is set to soar, potentially contributing nearly 19% to the country’s GDP by 2026. Headquartered in Hsinchu City, Taiwan, TSM manufactures, tests, and markets integrated circuits and other semiconductor products globally. Its products are used in automotive electronics, high-performance computing, and mobile device markets.

TSM’s net sales increased 40.1% year-over-year to NT$673.51 billion ($21.25 billion) in the second quarter that ended June 30, 2024. Its gross profit grew 37.6% from the prior year’s quarter to NT$358.13 billion ($11.29 billion), while its income from operations came in at NT$286.56 billion ($9.04 billion), up 41.9% year-over-year. In addition, the company’s net income and EPS increased 36.3% year-over-year to NT$247.85 billion ($7.82 billion) and NT$9.56, respectively.

The consensus EPS estimate of $6.60 for the current year ending December 2024 represents a 27.4% improvement year-over-year. The consensus revenue estimate of $88.40 billion for the same period indicates a 29.1% increase from the prior year.

Moreover, the stock has gained more than 99% over the past year, which is impressive. Its 12-month price target of $205 reflects an 18.4% potential upside.

QUALCOMM Incorporated (QCOM)

QCOM specializes in foundational technologies for the wireless industry. The company operates through three segments: Qualcomm CDMA Technologies; Qualcomm Technology Licensing; and Qualcomm Strategic Initiatives.

QCOM’s revenue increased marginally year-over-year to $9.39 billion in the fiscal second quarter (ended March 24, 2024). Its non-GAAP net income grew 14.1% from the year-ago value to $2.76 billion, while its EBIT rose 31.8% year-over-year to $2.49 billion over the period. The company’s non-GAAP EPS increased 13.5% from the year-ago value to $2.44.

Buoyed by its strong financial performance, the company paid a quarterly dividend of $0.85 per common share to its shareholders on September 26, 2024. QCOM pays an annual dividend of $3.40, which translates to a 2% yield on the current price. Plus, it has a payout ratio of 34.1%.

Street expects QCOM’s revenue for the fourth quarter (ended September 2024) to increase 13.8% from the prior year to $9.86 billion. Its EPS for the same period is expected to grow by 26.1% year-over-year to $2.55. It is no surprise that the company has topped the revenue and EPS estimates in each of the trailing four quarters.

Over the past year, the stock has returned nearly 50%. Moreover, out of 21 analysts that rated QCOM, 13 rated it Buy, while seven rated it Hold. The 12-month median price target of $218.25 indicates a 31.3% upside potential from the last closing price.

Taiwan Semiconductor's 10% Dip: Is It Time to Buy?

Posted on by The INO.com Team

With a $897.58 billion market cap, Taiwan Semiconductor Manufacturing Company Limited (TSM) plays a crucial role in the global semiconductor ecosystem by leading in the production of advanced chips used across several industries, including consumer electronics, automotive, telecom, and artificial intelligence (AI).

As one of the world’s largest independent semiconductor foundries, TSM’s expertise in advanced process technologies, such as 3nm and 5nm nodes, has made it a critical supplier for major tech companies, such as NVIDIA Corporation (NVDA), Advanced Micro Devices, Inc. (AMD), and Apple Inc. (AAPL).

Recently, the stock has dipped by around 10% from its all-time highs, making many investors wonder whether this pullback offers a prime buying opportunity. Let's assess whether long-term investors should capitalize on TSMC’s discounted price.

TSMC’s Technological Leadership

Taiwan-based TSMC’s role in advancing manufacturing chip technology has solidified its position as a critical player in the high-tech ecosystem, particularly in industries such as AI, 5G, automotive, and data centers. One of the company’s greatest strengths is its leadership in advanced node technology.

As a global chip leader, TSM provides the most advanced and comprehensive portfolio of dedicated foundry process technologies, including A16, 2nm, 3nm, 5nm, 7nm, and more. The company’s 3nm process is the industry’s leading semiconductor technology, providing the best power, performance, and area (PPA) and represents a full node advance from the 5nm generation.

TSMC continuously expands its 3nm technology portfolio to cater to diverse customer needs. Last year, the chip giant added new members to its industry-leading 3nm technology family, including the N3X process, designed specifically for high-performance computing (HPC) applications, and N3AE, facilitating an early start for automotive applications on the most advanced silicon technology.

Moreover, TSMC’s 2nm technology employing nanosheet transistors continues to make significant progress in terms of yield and device performance and is expected to commence production in 2025.

Earlier this year, at its 2024 North America Technology Symposium, TSMC introduced its latest semiconductor process, advanced packaging, and 3D IC technologies, showcasing its silicon leadership in driving the next generation of AI innovations.

With TSMC's cutting-edge N3E technology now in production and N2 slated for production in the second half of 2025, the company unveiled A16, the next technology in its roadmap. A16, set for production in 2026, integrates TSMC’s Super Power Rail architecture with nanosheet transistors. It enhances logic density and performance by allocating front-side routing resources to signals, making it well-suited for HPC products.

Also, the chip company introduced its System-on-Wafer (TSMC-SoW™) technology, a groundbreaking solution designed to deliver exceptional performance to the wafer level in addressing the future AI needs of hyperscaler data centers.

TSMC Surpasses Second-Quarter Earnings Expectations Amid AI Chip Boom

TSMC’s revenue and earnings beat analyst expectations in the second quarter of 2024 as demand for advanced chips used in AI applications continues to surge. In the quarter that ended June 30, 2024, the company’s net revenue rose 40.1% year-over-year to $20.82 billion. That surpassed analysts’ revenue estimate of $20.09 billion.

CEO C.C. Wei, in an earnings call, said business during the quarter was supported by robust demand for its industry-leading 3nm and 5nm technologies. TSMC’s shipments of 3-nanometer accounted for 15% of total wafer revenue, 5-nanometer constituted 35%, and 7-nanometer made up 17%. Advanced technologies, defined as 7-nanometer and more advanced technologies, accounted for 67% of total wafer revenue.

TSMC’s non-GAAP income from operations rose 41.9% year-over-year to $8.86 billion. Its net income and earnings per ADR were $7.66 billion and $1.48, increases of 36.3% year-over-year, respectively. Its earnings per ADR compared to the consensus estimate of $1.42.

“Moving into third quarter 2024, we expect our business to be supported by strong smartphone and AI-related demand for our leading-edge process technologies,” said Wendell Huang, Chief Financial Officer of TSMC.

Based on the company’s current business outlook, TSMC’s management expects revenue between $22.40 billion and $23.20 billion for the third quarter of 2024. The company’s gross profit margin is projected to be between 53.5% and 55.5%, and its operating profit margin is anticipated to be between 42.5% and 44.5%.

Why TSMC's Stock Dip May Be a Buying Opportunity

TSMC's leadership in advanced chip manufacturing, coupled with the growing demand for advanced chips across AI, 5G, and high-performance computing sectors, positions the company for long-term growth. Management has projected third-quarter revenue to be $22.40-$23.20 billion, compared to $17.30 billion reported in the previous year’s quarter.

Meanwhile, analysts appear highly bullish about the company’s earnings growth. Street expects TSMC’s revenue and EPS for the current quarter (ending September 2024) to grow 38.8% and 37.9% year-over-year to $23.44 billion and $1.78, respectively.

For long-term investors, TSMC's recent 10% decline may present an opportunity to buy into a company at the forefront of technological innovation. While short-term market fluctuations and geopolitical concerns may persist, the company's technological leadership and strong growth outlook make it a compelling choice for those looking to benefit from the continued evolution of AI and semiconductor technology.

Bottom Line

TSMC's recent stock dip presents a potential buying opportunity for long-term investors seeking exposure to a global leader in semiconductor innovation. With its industry-leading 3nm and 5nm process technologies, TSMC is well-positioned to capitalize on the growing demand for advanced chips, particularly in AI, 5G, and high-performance computing (HPC) industries.

While geopolitical risks and market volatility may pose challenges in the near term, TSMC’s strong earnings outlook and continuous innovation in semiconductor manufacturing suggest that this dip could be a strategic entry point.

Why TSMC Is Essential to the AI Ecosystem: An Investor’s Perspective

Posted on by The INO.com Team

Taiwan Semiconductor Manufacturing Company Limited (TSM), valued at $866.70 billion market cap, is a cornerstone of the global semiconductor industry and is increasingly pivotal to the rapidly evolving artificial intelligence (AI) ecosystem. As the world’s largest pure-play semiconductor foundry, TSMC’s role in AI innovation and development is profound and indispensable.

This article explores why TSMC is crucial to the AI ecosystem and why investors should closely monitor this semiconductor giant.

Vital Role of TSMC in the AI Revolution

TSM, headquartered in Hsinchu City, Taiwan, is the world’s leading semiconductor foundry. The company nurtures a dynamic ecosystem of global customers and partners by offering the industry’s leading process technologies and a portfolio of design enablement solutions, driving innovation across the global semiconductor sector.

The company’s commitment to research and development (R&D) is a key driver of its success. TSMC invests heavily in developing new process technologies and enhancing its manufacturing capabilities. The continuous innovation enables TSMC to meet the evolving needs of AI applications and maintain its competitive edge. For investors, TSMC’s focus on R&D represents a strong growth driver and a safeguard against technological obsolescence.

TSMC offers the most advanced and extensive range of dedicated foundry process technologies, including 2nm technologies, 3nm technology, 5nm technology, and 7nm technology, among others. This comprehensive portfolio supports several applications, from cutting-edge consumer electronics to high-performance computing and AI-driven innovations.

At its 2024 North America Technology Symposium in April, the chip giant introduced its latest semiconductor process, advanced packaging, and 3D IC technologies, showcasing its silicon leadership for the next wave of AI innovations. It debuted the TSMC A16™ technology, which features cutting-edge nanosheet transistors with an innovative backside power rail solution, set for production in 2026. The new technology promises significant enhancements in logic density and performance.

Meanwhile, expanding the reach of TSMC’s advanced technology to a broader range of applications, the company announced N4C, an extension of the N4P technology with up to an 8.5% reduction in die cost and minimal adoption effort, and is slated for volume production in 2025.

Additionally, TSMC introduced its System-on-Wafer (TSMC-SoW™) technology, a groundbreaking solution designed to deliver revolutionary performance to the wafer level in addressing the future AI needs of hyperscaler data centers. Also, the company is advancing its Compact Universal Photonic Engine (COUPE™) technology to support the rapid increase in data transmission demands driven by the AI boom.

Moreover, major tech companies, includingc, Advanced Micro Devices, Inc. (AMD), and Apple Inc. (AAPL), rely on TSMC for the production of their most advanced processors and GPUs.

Second-Quarter 2024 Revenue and Profit Beat Analyst Expectations

TSM’s revenue and earnings surpassed analyst estimates in the second quarter of 2024 as demand for advanced chips utilized in AI applications continues to rise. For the second quarter that ended June 30, 2024, the company’s net revenue increased 40.1% year-over-year to $20.82 billion. That beat analysts’ revenue estimate of $20.09 billion.

During the second quarter, the company’s shipments of 3-nanometer made up 15% of total wafer revenue, 5-nanometer accounted for 35%, and 7-nanometer constituted 17%. Advanced technologies, defined as 7-nanometer and more advanced technologies, accounted for 67% of total wafer revenue.

The company’s gross profit was $11.07 billion, up 37.6% from the previous year’s quarter. TSMC’s non-GAAP income from operations rose 41.9% year-over-year to $8.86 billion. Its net income and earnings per ADR came in at $7.66 billion and $1.48, increases of 36.3% year-over-year, respectively. Its earnings per ADR compared to the consensus estimate of $1.42.

As of June 30, 2024, TSMC’s cash and cash equivalents were $55.38 billion, and its total assets amounted to $184.13 billion.

“Our business in the second quarter was supported by strong demand for our industry-leading 3nm and 5nm technologies, partially offset by continued smartphone seasonality,” said Wendell Huang, Chief Financial Officer of TSMC. “Moving into third quarter 2024, we expect our business to be supported by strong smartphone and AI-related demand for our leading-edge process technologies.”

Furthermore, TSMC expects third-quarter revenue between $22.40 billion and $23.20 billion. That compares to $17.30 billion in revenue reported in the same period of 2024. The company’s gross profit margin is projected to be between 53.5% and 55.5%, and its operating profit margin is expected to be between 42.5% and 44.5%.

Bottom Line

TSMC remains a prominent player in the rapidly expanding AI ecosystem. As the world’s largest pure-play semiconductor foundry, TSMC’s leadership in advanced process technologies and commitment to continuous innovation ensure its pivotal role in powering next-generation AI applications.

The company’s comprehensive range of dedicated foundry process technologies, including industry-leading 2nm, 3nm, and 5nm technologies, alongside recent breakthroughs such as the TSMC A16™ and System-on-Wafer (TSMC-SoW™) technologies, underscores its strategic importance for shaping the future of AI.

The impressive financial performance in the second quarter of 2024, where revenue and EPS surpassed analyst expectations, highlights TSMC’s strong market position and resilience. As demand for advanced chips continues to surge, particularly in AI and high-performance computing, TSMC’s innovative solutions and robust financial health position it well for sustained growth and profitability.

Susquehanna analyst Mehdi Hosseini maintained Positive on TSM shares, with a price target of $250. Moreover, in July, Needham reaffirmed a Buy rating on shares of TSM with a price target of $210.

Amid this backdrop, investors could consider adding TSMC to their portfolio, particularly if they want to gain exposure to the burgeoning AI sector. However, it is also essential to remain mindful of potential risks, including geopolitical tensions and market fluctuations, which could impact the semiconductor industry.

Is Taiwan Semiconductor Manufacturing (TSM) The Backbone of AI Chip Manufacturing?

Posted on by The INO.com Team

The semiconductor industry is experiencing an unprecedented buzz at the moment. In March, KPMG unveiled its 2024 Global Semiconductor Industry Outlook after surveying 172 executives in the field. A staggering 85% of these individuals projected a double-digit increase in the industry’s revenue in 2024.

The automotive industry, artificial intelligence (AI), and microprocessors remain the primary catalysts for growth in the semiconductor sector. Notably, NVIDIA Corporation (NVDA), a leading vendor of graphics processing unit (GPU) components essential to powering cutting-edge AI systems, has emerged as a prominent beneficiary due to its strong market position.

Another tech stock, Taiwan Semiconductor Manufacturing Company Limited (TSM), also seems well-positioned to ride the AI wave. Also known as TSMC, the company is the largest contract semiconductor foundry globally, with a market cap of $705.69 billion. It oversees production for many renowned chip designers, such as NVDA, Apple Inc. (AAPL), and Advanced Micro Devices, Inc. (AMD).

TSM is dominant in the third-party chip manufacturing sector, claiming over 50% of the market share. This immense power grants the company significant influence within the semiconductor industry, particularly in the realm of AI chips. TSM takes charge of approximately 90% of advanced chip production for third-party companies, making its role crucial for AI models reliant on such technology.

Furthermore, TSM is currently overcoming a previous downturn in the semiconductor sector and experiencing an upturn in growth, aided by advancements in artificial intelligence. On March 8, the company disclosed a consolidated revenue of NT$181.65 billion ($5.68 billion) for February 2024, representing a rise of 11.3% from February 2023.

Moreover, TSM’s January through February 2024 revenue reached NT$397.43 billion ($12.43 billion), showcasing a noteworthy surge of 9.4% compared to the corresponding period in 2023.

In addition, as of December 31, 2023, the company's cash and cash equivalents amounted to $47.66 billion, up 9.1% year-over-year. Moreover, as of December 31, 2023, total assets grew 11.4% year-over-year to $179.93 billion. TSM’s strong liquidity position provides resilience, flexibility, and opportunities for growth and value creation, enhancing the company’s financial health and competitiveness in the market.

Strategic Investments and Expansion Plans

TSM has been actively investing in strategic initiatives to fortify its global dominance in producing cutting-edge semiconductor chips. It boasts a staggering 90% share in manufacturing these highly coveted chips, integral to the functionality of various devices, including smartphones and AI technology.

Although there may be a few geopolitical uncertainties impacting TSM, with the company having its headquarters in Taiwan, which China asserts as part of its territory, it is actively expanding its operations beyond Taiwanese borders.

Recently, TSM unveiled its inaugural fabrication plant in Kumamoto, Japan. Plans are also underway to inaugurate two $40 billion facilities dedicated to producing advanced microprocessors in Phoenix, Arizona. Additionally, TSM has committed $3.80 billion to establish a fabrication plant in Dresden, Germany, marking its first establishment in Europe.

Furthermore, NVDA plans to introduce advancements to its H100 and GH100 models in the second quarter of 2024 - the H200 and GH200. It has also debuted the B100/B200 and GB200 on its Blackwell platform during GTC. These chip offerings will significantly enhance operations for NVDA’s AI GPU’s sole maker -TSM.

AMD predicts that the market for AI GPUs will reach $400 billion by 2027, with a CAGR of 70%. TSM has already committed substantial capital expenditures to increase its production capacity and meet customer demands in this expanding market.

TSM’s management anticipates that the fiscal 2024 first-quarter revenue will range from $18.0 billion to $18.8 billion. The company’s gross profit margin could fall between 52% and 54%, while its operating profit margin is expected to range from 40% to 42%. Its 2024 CapEx guidance of $28 billion to $32 billion indicates a strategic shift where the rate of capital spending growth is stabilizing as TSMC capitalizes on its growth opportunities.

TSM plans to manage its capital with a focus on several key objectives: funding organic growth, ensuring profitability, maintaining financial flexibility, and delivering sustainable and increasing cash dividends to shareholders. Owing to diligent capital management, TSM's Board of Directors authorized in November 2023 to increase the cash dividend for the third quarter of 2023 from NT$3 ($0.09) to NT$3.50 ($0.11) per share.

From now on, this will be the new minimum quarterly dividend level. The cash dividend for the third quarter of 2023 will be paid out in April 2024.

Moreover, TSM’s shareholders received a cash dividend of NT$11.25 ($0.35) per share in 2023, and they will receive a minimum of NT$13.5 ($0.42) per share in 2024. In the coming years, the company anticipates a shift in its cash dividend policy, moving from maintaining sustainable dividends to steadily increasing cash dividends per share.

Bottom Line

Investors aiming to capitalize on the AI boom should prioritize investing in companies that play an indispensable role in developing and promoting AI technologies. Focusing on foundational players in the chip industry is crucial as these companies are well-positioned to drive and benefit from AI advancements in the long term. One such promising industry player is TSMC.

Though TSM does not immediately appear as an AI staple, its role in the AI pipeline is paramount and arguably on par with any other enterprise. Data centers rely heavily on GPUs, which serve as the neural center of AI computing systems. The process heavily relies on TSM's exceptional manufacturing processes and the semiconductors that it produces for its client companies.

TSMC’s chief executive officer, C.C. Wei, foresees the company’s AI-centric chip revenue to expand at a CAGR of 50%. By 2027, he projects AI chips to make up a high-teens portion of the company’s revenue.

With its operations well-suited to leverage the ongoing AI wave, TSM’s stock has surged more than 57% over the past six months. Positioned firmly with a proven track record of success, strategic investments, and a flourishing market for AI-based chips, TSM presents an appealing opportunity for investors seeking substantial returns.