November 5, 2024

AI Chip Revolution: Why Taiwan Semiconductor is the Must-Watch Stock Following Cerebras IPO

1 AI Chip Stock Set to Win from the Cerebras IPO

In the ever-evolving world of artificial intelligence (AI) and semiconductor technology, exciting developments are underway. Recently, CNBC reported that Cerebras Systems, an AI chip startup, is preparing to make its debut on the equity markets through an initial public offering (IPO). Cerebras stands as a competitor to the industry titan Nvidia (NVDA), known for its advanced graphics processing units (GPUs) that power generative AI models like ChatGPT.

The company claims that its WSE-3 chip surpasses Nvidia’s H100 in terms of core count and memory capacity. The momentum behind AI technology has clearly benefited Cerebras, as evidenced by its impressive revenue growth, which soared to $66.6 million in the first half of 2024, starkly up from just $8.7 million in the same period last year. Despite remaining unprofitable, the company has significantly narrowed its net losses to $66.6 million over the last two quarters, compared to $77.8 million in losses during the previous year.

In 2023, Cerebras recorded revenue of $78.7 million, alongside a staggering net loss of $127.2 million. The trend of increasing revenue continued in Q2 of 2024, reporting $69.8 million in sales but with a net loss of $50.9 million. One of the driving forces behind Cerebras’s growth is its operating expenses; these have spiked in 2024 primarily due to a larger workforce, which is strategically positioned to facilitate continued revenue growth.

As we’ve observed, the AI chip market is rapidly expanding, with Big Tech players eager to cement their foothold in this burgeoning segment. Public cloud giants like Amazon (AMZN), Microsoft (MSFT), and Google (GOOG) have begun developing their own AI chips to cut costs and mitigate reliance on third-party chip manufacturers. Interestingly, Cerebras’s largest customer, UAE-based Group 42, represented a whopping 83% of the company’s total sales in 2023. This level of dependency raises questions about diversification and stability in the face of shifting market dynamics. In the typical fashion of semiconductor companies, Cerebras outsources its chip production to Taiwan Semiconductor Manufacturing (TSM), the world’s preeminent chip foundry, which stands poised to benefit from the ongoing AI boom.

The Bull Case for Taiwan Semiconductor Stock

As an investor focused on sound financial principles, one cannot overlook the exceptional prospects of Taiwan Semiconductor, currently valued at approximately $892 billion. TSM specializes in manufacturing, packaging, testing, and selling integrated circuits (ICs) and other semiconductor components. The company’s sales have surged from $35.7 billion in 2019 to an impressive $76.4 billion over the last twelve months. In Q2 of 2024, TSM reported a 10.3% year-over-year revenue increase thanks to robust demand for its 3-nm and 5-nm technologies, although this was partially offset by a decline in smartphone business seasonality.

TSM is not only growing its top line but also remains remarkably profitable. Its gross margin increased by 10 basis points to 53.2% in Q2, while operating margin saw a 50 basis point rise to 42.5%, solidifying TSM’s status as one of the most lucrative tech investments on the market today. Management has articulated expectations for its AI-related chip sales to expand at a healthy compounded annual growth rate (CAGR) of 50% through 2028, signaling that these chips will account for nearly one-fifth of total sales revenue in the near future.

The aggressive tailwind from AI advancements is expected to catapult TSM’s overall revenue growth at a CAGR of 15% to 20% in the upcoming years. Consequently, the strong revenue momentum and a focus on operational efficiency are positioned to support consistent dividend increases going forward. Currently, TSM provides shareholders with an annualized dividend of $2.48 per share, translating to a forward yield of 1.43%. This translates to a substantial annual dividend payout of about $12.5 billion. Moreover, over the past ten years, TSM has boosted its dividend payout by more than 400%, enhancing shareholder returns considerably over time.

What’s the Forecast for TSM Stock?

Analysts are overwhelmingly optimistic about TSM, reflected in its consensus “strong buy” rating. Out of ten analysts tracking TSM stock, eight advocate for a “strong buy,” one suggests a “moderate buy,” and one advises a “hold.” The average 12-month target price for TSM shares is pegged at $204.71, a promising 19% above current trading levels. Projections indicate TSM’s adjusted earnings are expected to grow from $5.19 per share in 2023 to $6.57 per share in 2024, with continued upward momentum pushing earnings to an estimated $8.27 per share by 2025.

Currently, TSM is trading at a trailing earnings multiple of 33x. If this multiple holds steady, TSM could trade as high as $275 per share by 2026, reflecting a substantial upside potential exceeding 60% from current valuations.

Conclusion

Market participants should brace themselves for an interesting era in the AI semiconductor sector. Cerebras’s IPO is a notable event, but the underlying strength and growth trajectory of Taiwan Semiconductor make it an attractive investment opportunity. With an AI boom on the horizon, TSM stands poised to reap the rewards—making it a stock worth watching for prudent investors who appreciate traditional financial tenets.

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