Although the artificial intelligence (AI) investing trend has been going on for some time, plenty of companies are still seeing rapid growth in products related to AI. One of those is Taiwan Semiconductor (TSM +0.47%), the world's largest chip manufacturer.
Taiwan Semi, as it's often called, is seeing massive growth from its AI product line, which is starting to become a significant part of its business. It's going so well that management projects AI-related revenue to triple this year. That's huge news for investors, but is it enough to buy the stock?
Taiwan Semiconductor's AI product line is highly specific
AI-related products could encompass a lot of what Taiwan Semi does. One of its largest business segments is manufacturing chips for Apple, which made up around a quarter of total sales in 2021, 2022, and 2023. With new iPhones equipped with AI features, investors would be forgiven for thinking this category falls under the AI umbrella.
Management defines AI-related items as chips that go into GPUs (graphics processing units), AI accelerators, and central processing units (CPUs) performing training and inference functions. Basically, if a chip is being placed in a computing server dedicated to AI training and is not related to networking equipment in that server, then it's placed in this category. This is a pretty specific category and gives investors a great idea of how TSMC's AI business is faring.
NYSE: TSM
Key Data Points
It's incredible news for investors, with management forecasting that AI-related revenue will more than triple this year and account for a mid-teens percentage of Taiwan Semi's total revenue in 2024. It also represents an acceleration from where management thought they would be. In second-quarter 2023, management guided that AI-related revenue would grow at around a 50% compound annual growth rate (CAGR) in the next five years, when it would make up a low-teens amount of its total revenue.
Clearly, TSMC's AI chip growth is far ahead of schedule, making it a strong AI investment pick. However, another critical part of the company's investment thesis is that it doesn't require you to pick a winner in the AI space.
Taiwan Semiconductor will be a winner in the AI race
Because all these AI companies need chips to power either GPUs or custom-built chips specifically designed for AI training, they turn to Taiwan Semi for its manufacturing capabilities. CEO C.C. Wei has this to say about that fact in its conference call: "Almost every AI innovator is working with TSMC. And so, we probably get the deepest and widest growth of anyone in this industry."
That sums up Taiwan Semiconductor's investment thesis extremely well, as TSMC will benefit regardless of which company develops a winning AI product.
This enthusiasm has made the stock a bit expensive, as it trades for 30.6 times trailing earnings.
TSM PE Ratio (Forward 1y) data by YCharts.
However, that strong growth is expected to continue in 2025, as the stock trades for 21.8 times 2025 earnings. That's not a bad price to pay for the stock, especially if it can maintain the growth it put up in the third quarter.
Taiwan Semi grew revenue at a 36% year-over-year pace (in U.S. dollars), and earnings per share increased by 51% to $1.94. That's a solid performance, and if Taiwan Semi keeps that growth up, the price you pay for the stock today will be worth it.
Taiwan Semiconductor is a fantastic AI investment because it doesn't require you to pick a winner in the space. With AI revenue becoming a meaningful part of the business, TSMC has risen to the top as one of the best investments you can make today.
