Taiwan Semiconductor Manufacturing Is the Pickax of the Synthetic Intelligence (AI) Gold Rush. Is There Extra Upside?

Should you’ve been an investor for some time, you have doubtless heard the phrase “picks and shovels” when referring to an organization. This moniker is given to a enterprise that won’t pursue a pattern straight. As a substitute, it is giving its shoppers the instruments they want of their efforts. In terms of the synthetic intelligence (AI) gold rush, there are a number of picks-and-shovels corporations which are excelling.

Whereas many might level to Nvidia as the last word instance, Taiwan Semiconductor Manufacturing (TSM -2.40%) provides the chips that go into Nvidia’s graphics processing items (GPUs). This notion that Taiwan Semi is akin to the pickax sellers within the gold rush is nice, but it surely’s a recognized instance. In consequence, the inventory has shot up considerably this yr.

Nonetheless, most buyers do not care about previous efficiency and wish to know if there’s extra left within the tank for Taiwan Semi’s inventory to rise. Let’s discover out.

The chipmaker behind a lot of the progressive AI know-how

Taiwan Semiconductor (or TSMC, because it’s typically recognized) is in a singular place as a chip foundry. As a result of many corporations do not have the infrastructure to construct chips, they outsource to TSMC. So an organization like Nvidia or Apple designs a chip after which provides that design to TSMC to fabricate for them. This is a wonderful place to be in, as Taiwan Semiconductor is a impartial social gathering.

Whereas TSMC makes Nvidia’s chips for its GPUs, it additionally makes chips for AMD. Moreover, with the main cloud computing suppliers beginning to design their very own chips as options to GPUs — like Alphabet‘s Tensor Processing Unit (TPU) — Taiwan Semiconductor stands to learn.

On the finish of the day, Taiwan Semiconductor is a winner whatever the type of computing a consumer chooses to run their AI workloads on. Administration additionally expects vital progress on this area.

It foresees AI-related income rising at a 50% compound annual progress fee (CAGR) for the following 5 years. By that point, it estimates AI computing will make up round 20% of its complete income.That is enormous progress, and it additionally ties into administration’s overarching projection.

Throughout its investor convention in January 2022, administration guided for a 15% to twenty% income CAGR for the “subsequent a number of years.” Administration reiterated that steering for 2024 and maintained the stance that the extent of progress is achievable.

A 15% to twenty% CAGR for a corporation the dimensions of Taiwan Semiconductor is spectacular, and it is why buyers are so excited concerning the inventory. However there’s additionally yet one more catalyst that may very well be even larger.

Apple’s newest announcement may very well be enormous for TSMC

Whereas Taiwan Semiconductor would not name out firm names within the gross sales focus part of its annual report, one consumer made up 25% of the corporate’s income in 2023. Some might imagine it is Nvidia, however this similar consumer additionally accounted for a couple of quarter of TSMC’s income in 2021 and 2022, a time when Nvidia’s GPUs weren’t in demand.

There’s actually just one firm this may very well be: Apple. As a result of TSMC is a serious provider of chips that go into iPhones, Apple is an enormous buyer.

Apple additionally had an enormous announcement at its Worldwide Builders Convention final week: Generative AI options will solely be obtainable to iPhone 15 telephones or newer. That is enormous as a result of it is estimated that 90% of the world’s iPhones are older than this era, which might ignite an enormous refresh cycle.

As a result of 1 / 4 of Taiwan Semiconductor’s enterprise is from Apple, that is enormous information for the corporate. Apple’s inventory was up over 10% within the days following the announcement, however TSMC was solely up about 2.5%.

AAPL information by YCharts

That is an oversight by the market and may very well be an enormous alternative for buyers to reap the advantages of elevated iPhone demand in another method.

With large AI demand nonetheless coming and a possible improve cycle beginning for iPhones, there’s nonetheless loads of fuel left in Taiwan Semiconductor’s inventory. I believe it is among the finest buys available on the market proper now, and buyers shall be thanking themselves years down the street for getting it.