We recently compiled a list of the 35 Chip Stocks Powering AI Boom. In this article, we are going to take a look at where Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) stands against the other AI stocks.
AI has played a pivotal role in driving growth within the semiconductor market, transforming it into one of the most lucrative sectors globally. As AI applications proliferate across industries — from cloud computing and autonomous vehicles to healthcare — demand for advanced semiconductor technologies has surged. NVIDIA, a leader in AI GPUs, reported record revenues exceeding $30 billion in Q2 2024, largely driven by AI-related chip sales. Jensen Huang, the CEO of the chipmaker, remarked that AI was the most powerful technology force of the time and was transforming industries across the board.
AI demands massive data processing capabilities, which in turn requires highly specialized semiconductors like GPUs, TPUs, and AI accelerators. Experts highlight that 75% of AI workloads rely on advanced chips designed specifically for machine learning and deep learning tasks. Research firm Gartner predicts that 70% of all new AI applications by 2025 will require hardware accelerators, primarily in data centers and edge computing environments, underscoring the critical role of AI in the semiconductor ecosystem. As AI models become more complex, they require exponentially larger memory and storage solutions.
Read more about these developments by accessing 30 Most Important AI Stocks According to BlackRock and AI News You Should Not Have Missed.
AI models like GPT-4 by OpenAI and PaLM by Google have billions of parameters, and memory-intensive High Bandwidth Memory (HBM) chips are crucial for training and inference. This has led to a significant increase in the production of memory chips, with AI-related demand accounting for a large portion of the $500 billion semiconductor industry. AI-focused startups and established companies alike are benefiting from this growth. For instance, the AMD acquisition of Xilinx in 2022 was aimed at enhancing AI capabilities, resulting in a major competitive advantage in AI chips.
However, the rosy picture has been dented in recent weeks on the back of a major selloff in the tech sector and increased volatility in the semiconductor space. Robert Maire, the chief of Semiconductor Advisors, a prominent financial consulting firm, recently appeared on news platform CNBC to discuss the market volatility in the chip sector, highlighting factors like earnings not being enough to keep stocks at inflated values and the threat of possible Chinese oversupply in trailing edge semiconductors. Maire said that AI has been the only driver of growth in the semi market, leading to a situation where investors got ahead of themselves.
Maire highlighted during his appearance that China was still lagging behind the US and Europe in the leading-edge AI space, as it had been deprived of tools needed to keep pace with change in this market. However, the chip advisor claimed that Chinese firms have caught up in the trailing edge AI space, citing examples of Chinese firms like Semiconductor Manufacturing International Corporation and Hua Hong Semiconductor Limited already exceeding US-based firms like UMC and GlobalFoundries in capability. He cautioned that despite progress, Chinese firms were still not doing enough to challenge US-based leaders in the trailing edge space.
Read more about these developments by accessing 33 Most Important AI Companies You Should Pay Attention To and 20 Industrial Stocks Already Riding the AI Wave.
Our Methodology
For this article, we selected companies that operate in the semiconductor sector and have exposure to the AI industry. These stocks are also popular among hedge funds. 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).
An innovative technician wearing a lab coat manipulating semiconductor chipsets in a modern laboratory.
Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM)
Number of Hedge Fund Holders: 156
Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) makes and sells integrated circuits and semiconductors. The company recently posted sales numbers for August, indicating strong demand for AI products. The firm, which manufactures processors for NVIDIA, Apple, AMD, and other tech giants heavily spending on AI hardware for their AI data center build, said revenue for August came in at around $7.8 billion, up 33% from August 2023, but was down 2.4% from July. The revenue for the eight months ended in July jumped over 30% to almost $55 billion.
Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) is one of the favorite chip stocks on Wall Street. JPMorgan recently raised the price target on the stock to NT$1,200 from NT$1,080 and kept an Overweight rating, highlighting that TSM was now firmly on course to improve margins in the next few years. In an investor note, the advisory detailed that together with continued strong demand for artificial intelligence accelerators and leading market position, strong earnings growth was expected from TSM in the next few years.
Overall TSM ranks 2nd on our list of the 35 chip stocks powering the AI boom. While we acknowledge the potential of Taiwan Semiconductor Manufacturing Company Limited (NYSE: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 Taiwan Semiconductor Manufacturing Company Limited (NYSE: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. This article is originally published at Insider Monkey.