We came across a long thesis on Taiwan Semiconductor Manufacturing Co Ltd (NYSE:TSM) on ValueInvestorsClub by xxxOTK87. In this article we will summarize the bulls’ thesis on TSM. The company’s shares were trading at $167.63 when this thesis was published, vs. closing price of $208.61 on Jan 3rd.
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Taiwan Semiconductor Manufacturing Co Ltd (NYSE:TSM) is the world’s largest dedicated chip foundry, with over 60% market share. Employing more than 73,000 people, the company manufactures semiconductors for an illustrious customer base including Apple, AMD and Nvidia, based on proprietary integrated circuit designs.
The bull thesis is based on the argument that Taiwan Semiconductor Manufacturing Co Ltd (NYSE:TSM) is at an inflection point in its structural FCF growth story. First, the author believes that TSM will soon start realizing the pricing power amassed by its monopolistic position, as supply tightness in the space plays out well in the hands of TSM being the largest scale manufacturer – AI-related customers might face as much as 10% price increases in the near term. Second, TSM is well-positioned to increase its take rate in the production of chips, especially the AI-related ones, from 13% to 20%, as the author believes that Nvidia will sooner or later be challenged by competitors – this setup is inherently favorable for TSM as it decreases the fab’s dependency on one large client and thus increases its bargaining power. Though Nvidia maintains its technological leadership, there are applications where other chips might be more cost-effective, such as inference and AI-at-the-edge (refers to companies like Apple, Qualcomm, Intel and AMD). As a result, TSM’s ability to price-discriminate improved significantly, which is already reflected in such actions as significantly hiking prices on the CoWoS packaging process that is critical to AI chips.
To sum up, all the abovementioned dynamics lead to the market significantly underestimating TSM’s revenue growth potential. Despite being cautious in the near term, the author sees strong double-digit growth extending until 2028, which is above the consensus. By applying a target NTM FCF multiple of 22.5x, to reflect the probability of several macro risks, the author estimates that the stock could deliver an IRR of 17-18% from the market price at the time of the writeup.
While we acknowledge the 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 time frame. 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. This article was originally published at Insider Monkey.