The emergence of artificial intelligence (AI) over the past year has lit a fire under Taiwan Semiconductor Manufacturing (TSM 0.96%), or TSMC, as it's often called. The stock is up 58% over the past 12 months, which has some investors wondering if it's run too far, too fast, with limited upside ahead.
One Wall Street analyst believes the stock has further to run.
Riding the AI wave
Needham analyst Charles Shi increased his price target on TSMC to $168 while maintaining a buy rating on the stock. This represents a potential upside of 21%, compared to the stock's closing price on Wednesday.
The analyst acknowledges the potential for short-term production delays and inventory losses due to the recent earthquake in Taiwan, suggesting these factors may negatively impact the coming quarter. Shi lowered his earnings per share (EPS) estimates by about 3% for fiscal 2024.
However, the analyst emphasized the company will likely make up any lost sales in the third quarter and meet its full-year forecast. He called the company "one of the best AI pick-and-shovel stories."
I think the analyst has a point. When TSMC reported its Q1 results on Thursday, revenue grew 17% year over year in local currency, while EPS increased 9%. In Q2, management is forecasting 28% revenue growth at the midpoint of its guidance, suggesting growth will continue to accelerate.
Considering the opportunity afforded by AI, the analyst's point is well taken. "Picks and shovels" comes from a famous quote attributed to Mark Twain: "During the gold rush, it's a good time to be in the pick-and-shovel business."
In this case, AI is gold, and TSMC is in the picks-and-shovels business. As demand for AI accelerates, there will be a commensurate increase in demand for the processors that support it, many of which are manufactured by TSMC.
At less than 27 times earnings, TSMC is selling at a slight discount compared to the S&P 500. However, given the tailwinds of generative AI, this is an attractive opportunity.
