Taiwan Semiconductor Manufacturing Company Limited (TSM): A Bull Case Theory

We came across a bullish thesis on Taiwan Semiconductor Manufacturing Company Limited (TSM) on Make Money, Make Time’s Substack by Oliver | MMMT Wealth. In this article, we will summarize the bulls’ thesis on TSM. Taiwan Semiconductor Manufacturing Company Limited's share was trading at $200.78 as of Oct 18th. TSM’s trailing and forward P/E were 35.77 and 24.51 respectively according to Yahoo Finance.

A technician soldering a semiconductor chip, emphasizing the power of the company's products.

Taiwan Semiconductor Manufacturing Company (TSMC) remains a dominant force in the semiconductor industry, producing and selling integrated circuits to major clients such as NVIDIA, AMD, and Intel. The company's formidable competitive advantage stems from the complexity and cost of its manufacturing processes, which have created one of the largest moats in the market. In the third quarter, TSMC reported robust earnings, with revenue surpassing estimates by 1% and demonstrating a solid 13% quarter-over-quarter growth. This momentum is underscored by the company's significant margin expansion, with GAAP earnings per share (EPS) reaching $0.39, exceeding expectations by $0.03. Additionally, TSMC's cash and cash equivalents totaled $68 million, reflecting a slight increase over the previous quarter.

Management highlighted strong demand across all product categories, particularly in advanced technologies, which include high-performance computing and Internet of Things (IoT) applications, witnessing quarter-over-quarter growth rates of 11% and 35%, respectively. The CEO emphasized that AI-related demand is expected to be "extremely robust" until at least 2025, predicting that revenue from server AI processors will more than triple this year. This positioning showcases TSMC's strategic advantage in capitalizing on the burgeoning AI market.

Despite these promising developments, investor concerns linger regarding TSMC's heavy reliance on Taiwan for operations amid ongoing geopolitical tensions with China. However, the CEO has reported positive progress on TSMC's factories in Arizona, which are backed by support from federal, state, and local governments. This diversification not only mitigates geopolitical risks but also enhances flexibility for TSMC's customers, potentially leading to significant economies of scale as these facilities begin production over the next decade.

Management also discussed expansions in Japan and Germany, targeting volume production by 2027. While these initiatives may slightly pressure margins in the short term, they represent a long-term strategy to establish TSMC as one of the world's most cost-efficient manufacturers. For current shareholders, this is indicative of the sustainable competitive advantage TSMC is fostering.

In conclusion, TSMC's fortunes are closely tied to the growth trajectories of its major clients, such as NVIDIA and AMD. The company is well-positioned to harness the ongoing demand surge in semiconductors and AI technology. Although there may be some margin compression in the coming years due to capital expenditures and international expansions, TSMC's strategic investments are expected to yield substantial rewards over the next decade, making it a compelling choice for investors looking to benefit from the AI and semiconductor secular trends.

Taiwan Semiconductor Manufacturing Company Limited is on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 156 hedge fund portfolios held TSM at the end of the second quarter which was 135 in the previous quarter. While we acknowledge the risk and potential of TSM as an investment, our conviction lies in the belief that some 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 CL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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