If you’ve paid even the slightest bit of attention to the tech world lately, you probably came across the topic of artificial intelligence (AI). It’s harder to escape than a catchy pop song in the summer.

The Backbone of the AI Pipeline

Taiwan Semiconductor Manufacturing (NYSE: TSM) holds the crown as the world’s largest semiconductor foundry, boasting a commanding 61% market share of the global semiconductor foundry market as of the end of 2023. Its customer-centric foundry model ensures the production of tailored semiconductors (chips) to meet specific requirements.

At the core of the AI ecosystem lies TSMC, the cornerstone on which the entire AI pipeline is built. From large-scale AI models facilitating natural language processing to the functioning of data centers supported by high-performance AI chips and GPUs, TSMC’s role in manufacturing advanced chips vital for AI hardware cannot be overstated.

Reports indicate that TSMC accounts for approximately 90% of all AI chip manufacturing, establishing its indispensability in sustaining the AI industry’s current magnitude.

An Impending Revenue Resurgence for TSMC

TSMC’s revenue primarily stems from two main sources: smartphones accounting for 38% of quarterly revenue and high-power computing contributing 46% to the revenue mix.

While a previous slump in the global smartphone market did dent TSMC’s revenue and momentum in the first half of 2023, a swift recovery towards the end of the year alleviated concerns, setting the stage for a possible resurgence.

In a recent earnings call, TSMC’s CEO expressed optimism regarding a projected doubling of AI-related revenue within the year, forecasting significant growth rates in this segment over the next five years. The CEO’s bullish sentiment suggests that AI-related revenue could make up a substantial portion, around 20%, of the company’s total revenue in the near future.

Despite smartphones continuing to make significant contributions to TSMC’s revenue stream, the burgeoning demand for AI chips presents an exciting avenue for the chip manufacturer to not only flex its pricing power but also to enhance margins and free cash flow.

Evaluating TSMC’s Stock Position

Though TSMC shines as a beacon of technological advancement and innovation, its stock valuation may not necessarily be considered a bargain by traditional metrics. The company’s price-to-earnings (P/E) ratio currently stands near 32, notably higher than its five-year average.

However, TSMC’s robust growth prospects, particularly in the AI domain, coupled with anticipated rebounds in smartphone and PC markets, warrant the current premium on its stock. The company’s above-average dividend yield adds further allure for investors seeking a long-term position in this tech giant.

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