The dramatic AI-related rally in semiconductor stocks has surged back to life in 2024. Its resurgence traces back to Jan. 18 when Taiwan Semiconductor Manufacturing (TSM) – the world’s largest contract chipmaker – projected robust growth this year, anticipating a revenue increase of up to 26% as the global chip market emerges from a deep trough.
TSM’s numbers exceeded expectations, bolstering hopes for a rebound in smartphone demand and computing needs. However, it was the company’s AI focus that truly sparked market enthusiasm.
CEO CC Wei’s statement, “We expect 2024 to be a healthy growth year for TSMC, supported by robust [artificial intelligence] demand,” reverberated across the financial world, igniting a global surge in semiconductor-related stocks. On the day of the announcement alone, global chip stocks gained an astounding $160 billion in valuation.
Semiconductor Market Turning Point
Taiwan Semiconductor’s forecast added to the growing confidence that the chip industry had turned a corner in 2023, signaling a potential “turning point” for the $600+ billion market. The latest figures from the U.S.-based Semiconductor Industry Association (SIA) further strengthened this sentiment. Worldwide sales climbed to $48 billion in November, rising annually and quarterly for the first time in over a year, signaling an impending “vigorous upswing” in 2024.
John Neuffer, SIA chief executive, labeled this data “an indication that the global chip market is continuing to gain strength” after forecasting a 13% revenue increase to $588 billion in 2024.
Taiwan Semiconductor to Stay on Top
The company’s position as the go-to supplier for advanced chips for industry giants such as Nvidia and Apple has been invaluable. TSM’s growth outlook far exceeds the forecast for the overall semiconductor market. Revenues from high-performance computing applications, including generative AI, jumped by 17% in the fiscal fourth quarter, while smartphone chip revenues and automotive application sales also experienced significant growth.
With around 90% of the world’s advanced chip market and gross margins of nearly 60%, Taiwan Semiconductor is indeed a powerhouse. Its significant investment in advanced packaging technology, coupled with robust profit margins, has solidified its position. The company’s annual expenditure of more than $30 billion in capital ensures ongoing research and development, accelerating the pace of next-generation technology releases.
Wei expects that the annual growth rate for AI computing could reach 50% in the coming years, with AI processors potentially accounting for 15-20% of its revenue in the next five years. The company’s leading chip technologies, 3 nm and 2 nm, are well-positioned to meet the surging interest in generative AI. TSM foresees introducing its first 2 nm chips in 2025.
Morgan Stanley analysts in Asia predict that AI-related semiconductors will represent 15% of the company’s revenue by 2027, expanding at an 18% annual growth rate. They also forecast that high-performance computing, including AI and central processing units computing, may approach 50% of TSM’s total revenue, up from the current 44%.
All these factors make TSM stock a solid buy at its current prices, with a target of at least $150 a share.
