We recently compiled the list of the 15 Best Hardware Stocks According To Goldman Sachs using the latest sentiment data. In this article, we are going to take a look at where Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) stands against the other hardware stocks.
The soaring popularity of artificial intelligence for consumer and business applications has injected fresh life into the computing industry. If we’re to rewind the hands of time and go back to 2022, the stock market environment was considerably different from what it is now. All major technology stocks, including those that are responsible for making chips that power AI workloads were down by double digit percentages in the wake of breakneck inflation and rising interest rates.
Fast forward to 2024 and the rise in valuations seems to have no end in sight. One bank that’s quite optimistic about artificial intelligence is Goldman. Goldman’s analyst teams are among the best in the world, and they spend countless hours analyzing stocks and industries for the right set of picks that could disrupt the industry.
On this front, Goldman came out with a note recently that outlined a new beginning for the computer hardware industry. According to the bank, the introduction of AI has necessitated a global shift to new hardware that can support the technology. In its note, the bank’s analysts shared:
During the pandemic, the tech hardware industry peaked as the majority of work-from-home employees purchased equipment. The space currently has fully unwind this cycle and we notice stocks like HPQ trading at 9x their 2025 earnings estimates.
Most PCs purchased during the pandemic are expected to be replaced soon. We expect discernable new features of AI, enhanced security, and stronger computational power in upcoming PC and mobile device models, incentivizing the US consumer to spend more on newer equipment than historically, creating an unusually stronger cycle.
Goldman also created a basket of stocks where the highest weighted stock has an 8% weight and there are 20 stocks in the basket. According to Goldman analyst Faris Mourad:
The basket is composed of technology hardware stocks that may benefit from PC and mobile device renovations that could include AI features. The basket can trade up to $250m in one day with no name exceeding 10% of ADV.
Considering this optimism, we decided to take a look at the top Goldman’s top 15 hardware stock picks.
Our Methodology
To make our list of the top Goldman Sachs hardware stocks, we used the top holdings of the bank’s PC & Mobile Device AI Upgrades basket (GSXUPCAI).
For these hardware stocks, we also mentioned hedge fund investors. 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).
8. Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM)
Number of Hedge Fund Shareholders In Q1 2024: 135
Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) is the world’s largest contract chip manufacturer. This places it right at the heart of the AI hardware supply chain as leading players like NVIDIA rely on it to make their products. HSBC is also aware of this, as in a May 2024 analyst note the bank raised Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM)’s share price target to NT$1,025 from NT$993 and kept a Buy rating for the shares. HSBC increased Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM)’s 2024 EPS forecast by 3.5%, and added that the firm’s advanced 3-nanometer process technology positions it well in the industry.
Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM)’s larger peer Intel has a forward P/E of 28.90, and the Taiwanese firm is at level with this due to its ratio of 28.17. This shows that the market expects both firms to grow evenly in the future. Third Point Management mentioned Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) in its Q1 2024 investor letter. Here is what the firm said:
Today, TSMC derives a relatively small percentage of its revenues from AI processors, largely from NVDA, but we see that percentage quickly rising as AI compute broadens from just the GPU to custom accelerators. With Nvidia’s GPUs costing tens of thousands of dollars, the bulk of which go to Nvidia’s gross profit, hyperscalers are doubling down on their efforts to develop in-house silicon to alleviate AI compute’s economic burden. Google was the first mover to custom accelerators with the TPU almost 10 years ago, and today this is already a multi-billion dollar business for TSMC. Amazon, Microsoft, and Meta have all followed Google’s lead and have announced (and in Amazon’s case already mass producing) their own chips. As these products scale, we see TSMC’s AI revenue growing by multiples in the coming years.
While TSMC’s fundamental outlook looks bright, the market has concerns which are reflected in the stock’s 10x+ discount to the SOX, the widest in TSMC’s history. The main concern is Intel’s entry into the foundry market. While we commend Intel’s efforts to diversify the global semiconductor supply chain and have admiration for the company’s rich IP and manufacturing expertise, we think it will be difficult for Intel to challenge TSMC’s dominance in foundry. Putting aside the onerous capital requirements necessary to stand up a foundry business (TSMC’s capital budget stands at ~2x Intel’s projected EBITDA), we believe the transition from internal manufacturing to an external foundry will be a difficult one. Intel has spent the past 40+ years tailoring its manufacturing process and transistor design to suit its own narrow product suite. Broadening to a multitude of customized external customer designs across a variety of end markets, in particular mobile, we believe will prove challenging.
We believe TSMC has significant untapped pricing power which can be levered to offset (if not expand) its already admirable returns on capital.
Overall, TSM ranks 8th among the 15 best hardware stocks to buy according to famed investment bank. You can visit the 15 Best Hardware Stocks According To Goldman to see the other hardware stocks. While we acknowledge the potential of TSM as an AI 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 TSM 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. The article was originally published at Insider Monkey.