Is Taiwan Semiconductor (TSM) the Best AI Stock to Buy After Latest Earnings?

We recently published a list of Top 10 Trending AI Stocks in Q4. In this article, we are going to take a look at where Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) stands against other top trending AI stocks in Q4.

As LLMs continue to hog data from the open internet for training, publishers are growing concerned about their intellectual property and compensation. In a latest development, The New York Times issued a cease and desist letter to Perplexity to stop using its data for training without permission.

Gene Munster of Deepwater Asset Management, while talking about this news on CNBC, said that these developments could prove “horrendous” for LLMs in the short term.

“The short-term economics for these large language models is horrendous, and so, I think it changes from bad to worse in the short term. I just want to put some quick context around those numbers. Right now, OpenAI pays NewsCorp about $50 million. They’re going to do about $4 billion in revenue this year and $11 billion next year, so, I mean, it’s measurable.”

However, Munster thinks in the long term, these licensing deals would not impact major LLM companies negatively given the ROI they’d be enjoying.

READ ALSO 7 Best Stocks to Buy For Long-Term and 8 Cheap Jim Cramer Stocks to Invest In

The analyst also made a prediction about Perplexity. He believes the company would be acquired because it’s competing with a lot of “big guns.” He quoted Oracle’s Larry Ellison who said that it takes about $100 billion to be a “proprietary” large language model.

“So, you look at the $6 billion at OpenAI, and you need to be raising in chunks of billions, not millions. Understand that it’s a big raise for a private company that’s moving quickly, but they’re going to get acquired. They’re just up against too many other big guns here to try to get to those coveted four or five spots of the LLM landscape.”

For this article we picked 10 AI stocks trending based on latest news. With each company we have mentioned its hedge fund sentiment. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

A close-up of a complex network of integrated circuits used in logic semiconductors.

Number of Hedge Fund Investors: 176

UBS recently published a list of stocks it believes will be industry leaders by 2030. UBS believes the next decade will favor companies that use technology to disrupt industries.

“We see these as leading disruptors in industries undergoing technological change, which should have a lasting impact,” said UBS analyst Hartmut Issel in a note.

The firm identified 29 companies it expects to deliver stronger earnings growth than the broader market (S&P 500, NASDAQ), supported by “positive, long-term trends,” according to Issel.

Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) was among these stocks in the Enabling Tech category.

Revenue for enabling tech could reach $1.2 trillion by 2025, growing at around 15% annually from FY20 to FY25, according to UBS. The firm expects faster adoption of AI, cybersecurity, and other key technologies by businesses and governments, driven by increasing security breaches and the need to reduce costs through automation.

Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) is trending after impressive latest quarterly results. Here was the highlight of these results:

“The demand is real. And I believe it’s just the beginning of this demand. All right. So one of my key customers said, the demand right now is insane. That’s it’s just the beginning, it’s a form of scientific to be engineering.”

That was Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM)’s CEO comment during Q3 earnings call.

Do the numbers back these “insane” demand claims? You bet.

Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) reported consolidated sales of NTM 760 billion ($23.5 billion) for the quarter, surpassing the $23.3 billion expected by analysts. Sales grew 36% year-over-year, well above Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM)’s target growth rate of around 20% CAGR set in 2021.

Management attributed the growth to strong demand for smartphones and AI-related products, particularly their advanced 3-nanometer and 5-nanometer technologies. The AI-related demand, which Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) refers to as the High Performance Computing (HPC) segment, saw double-digit growth, along with the Smartphone segment. Together, these two segments make up 85% of Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM)’s revenue, with HPC now representing 51% of total revenue, up from 42% last year. Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM), which dominates the advanced chip fabrication market with a 90% share, showed its strength with these strong Q3 results.

Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) raised its capital expenditure outlook for FY2024 to just over $30 billion, in line with FY2023. Around 70% to 80% of this budget will go toward advanced process technologies. Management highlighted that higher capital spending is linked to greater growth opportunities in the future. As a result, Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) is expected to focus on 2nm and A16 technology ramps next year to expand capacity for increasing demand in lower nanometer chips.

Despite the stock’s recent rally, it remains reasonably priced. It’s trading at 28x forward non-GAAP P/E and 9.3x forward EV/sales. While these figures are above the 5-year averages, they’re justified by Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM)’s strong growth, with over 30% year-over-year expansion and significant margin improvements. This performance is well above the high-teens CAGR target set for 2021 to 2026. Moreover, its forward P/E remains below the Nasdaq 100’s 30.4x.

Diamond Hill Long-Short Fund stated the following regarding Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) in its Q2 2024 investor letter:

“On an individual holdings’ basis, top contributors to return in Q2 included our long positions in Alphabet, Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) and Microsoft. Semiconductor manufacturer Taiwan Semiconductor’s (TSMC) fundamentals remain solid as demand for its chips continues growing — particularly as the machine learning and cloud computing trends gain more traction.”

Overall, TSM ranks 5th on our list of top trending AI stocks in Q4. While we acknowledge the potential of TSM, our conviction lies in the belief that under the radar AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than TSM but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.

Disclosure: None. This article is originally published at Insider Monkey.