Buying an artificial intelligence (AI) stock that's trading at an attractive valuation and is growing at an impressive pace might seem difficult right now considering that companies in a position to take advantage of this technology have witnessed a rapid jump in their share prices in the past year or so.
Nvidia, for instance, is trading at 71 times trailing earnings, though the good part is that the chipmaker has been able to justify its premium valuation with outstanding growth. On the other hand, AI software play Palantir Technologies is trading at an expensive valuation, but its growth hasn't been enough to justify its rich multiples.
However, investors looking for a mix of growth and value in the AI niche are in luck as there is one company -- Taiwan Semiconductor Manufacturing (TSM 2.96%), popularly known as TSMC -- that's not only cheap right now but also seems set to deliver impressive growth. Let's look at why investors should consider buying this stock before it releases its first-quarter 2024 results on April 18.
NYSE: TSM
Key Data Points
TSMC is set to deliver stronger-than-expected growth
When TSMC released fourth-quarter 2023 results in January this year, the company guided for first-quarter 2024 revenue of $18.4 billion at the midpoint of its range.
However, monthly revenue stats for the first three months of 2024 indicate that it is well on its way to exceeding that mark. More importantly, revenue growth has accelerated with each passing month.
In January, TSMC's monthly revenue increased 8% year over year. This was followed by an 11% increase in February, while March was even better with a year-over-year gain of 34%. So first-quarter revenue came in at $18.86 billion, up almost 14% year over year and ahead of the $18.26 billion consensus estimate.
The complete quarterly results will be out on April 18, and it won't be surprising to see the stock surge higher once it reports. That's because the demand for AI chips across various applications is now moving the needle in a bigger way for TSMC, as its March quarterly revenue tells us.
Secular growth of the AI chip market will be a tailwind for TSMC
Apple is TSMC's largest customer, accounting for 25% of its top line. But the smartphone maker has been struggling for growth, as its recent results tell us.
Moreover, Apple starts ramping up the production of its iPhones, for which TSMC supplies chips, in the second half of the year. So the sharp acceleration in the chipmaker's revenue last month can be attributed to the booming demand from the likes of Nvidia, AMD, Intel, Qualcomm, and Broadcom, which are among its top seven customers.
All these chipmakers are focused on delivering new AI chips, as well as increasing the output of their existing products to meet the robust demand from customers. That's why TSMC has been rapidly increasing its manufacturing capacity. It is expected to double its advanced chip packaging capacity to 240,000 wafers this year from 120,000 wafers last year, driven mainly by demand from Nvidia, which accounts for an estimated 60% of its advanced chip packaging capacity.
Intel, on the other hand, recently unveiled a new AI accelerator called Gaudi 3 that's based on TSMC's 5-nanometer manufacturing process. Intel has already started shipping samples of this chip and expects to move into full production in the third quarter of 2024. Meanwhile, the interest in Broadcom's custom AI processors is increasing, and the company recently landed a new client as well.
Similarly, Qualcomm is on track to take advantage of the growing adoption of AI within smartphones and personal computers. In all, TSMC is in a prime position to capitalize on the secular growth of the AI chip market, especially considering that it is the world's leading semiconductor foundry with an estimated market share of 61%. That's well ahead of second-place Samsung's share of 11%.
Considering that the global AI chip market is forecast to grow at an annual pace of 38% through 2032, there is a good chance of TSMC sustaining its impressive momentum. The following chart suggests that analysts expect robust revenue increases in 2024 and beyond from last year's top line of $69.3 billion.
TSM revenue estimates for current fiscal year; data by YCharts.
That's why buying this semiconductor stock right now looks like a no-brainer given its attractive valuation. TSMC is trading at 29 times trailing earnings, a discount to the Nasdaq 100's earnings multiple of 30 (using the index as a proxy for tech stocks). The forward earnings multiple of 24 is also lower than the Nasdaq 100's reading.
What's more, TSMC stock is significantly cheaper than Nvidia, which means it's a less expensive way to play the AI chip boom.
Also, the evidence above shows that TSMC seems built for long-term growth from its crucial role in the AI chip market, which is why investors would do well to buy this AI stock before it jumps higher (and becomes expensive) following the 40% gains it has clocked so far in 2024.
