Is Taiwan Semiconductor Manufacturing (TSM) The Backbone of AI Chip Manufacturing?

The semiconductor industry is experiencing an unprecedented buzz at the moment. In March, KPMG unveiled its 2024 Global Semiconductor Industry Outlook after surveying 172 executives in the field. A staggering 85% of these individuals projected a double-digit increase in the industry’s revenue in 2024.

The automotive industry, artificial intelligence (AI), and microprocessors remain the primary catalysts for growth in the semiconductor sector. Notably, NVIDIA Corporation (NVDA), a leading vendor of graphics processing unit (GPU) components essential to powering cutting-edge AI systems, has emerged as a prominent beneficiary due to its strong market position.

Another tech stock, Taiwan Semiconductor Manufacturing Company Limited (TSM), also seems well-positioned to ride the AI wave. Also known as TSMC, the company is the largest contract semiconductor foundry globally, with a market cap of $705.69 billion. It oversees production for many renowned chip designers, such as NVDA, Apple Inc. (AAPL), and Advanced Micro Devices, Inc. (AMD).

TSM is dominant in the third-party chip manufacturing sector, claiming over 50% of the market share. This immense power grants the company significant influence within the semiconductor industry, particularly in the realm of AI chips. TSM takes charge of approximately 90% of advanced chip production for third-party companies, making its role crucial for AI models reliant on such technology.

Furthermore, TSM is currently overcoming a previous downturn in the semiconductor sector and experiencing an upturn in growth, aided by advancements in artificial intelligence. On March 8, the company disclosed a consolidated revenue of NT$181.65 billion ($5.68 billion) for February 2024, representing a rise of 11.3% from February 2023.

Moreover, TSM’s January through February 2024 revenue reached NT$397.43 billion ($12.43 billion), showcasing a noteworthy surge of 9.4% compared to the corresponding period in 2023.

In addition, as of December 31, 2023, the company's cash and cash equivalents amounted to $47.66 billion, up 9.1% year-over-year. Moreover, as of December 31, 2023, total assets grew 11.4% year-over-year to $179.93 billion. TSM’s strong liquidity position provides resilience, flexibility, and opportunities for growth and value creation, enhancing the company’s financial health and competitiveness in the market.

Strategic Investments and Expansion Plans

TSM has been actively investing in strategic initiatives to fortify its global dominance in producing cutting-edge semiconductor chips. It boasts a staggering 90% share in manufacturing these highly coveted chips, integral to the functionality of various devices, including smartphones and AI technology.

Although there may be a few geopolitical uncertainties impacting TSM, with the company having its headquarters in Taiwan, which China asserts as part of its territory, it is actively expanding its operations beyond Taiwanese borders.

Recently, TSM unveiled its inaugural fabrication plant in Kumamoto, Japan. Plans are also underway to inaugurate two $40 billion facilities dedicated to producing advanced microprocessors in Phoenix, Arizona. Additionally, TSM has committed $3.80 billion to establish a fabrication plant in Dresden, Germany, marking its first establishment in Europe.

Furthermore, NVDA plans to introduce advancements to its H100 and GH100 models in the second quarter of 2024 - the H200 and GH200. It has also debuted the B100/B200 and GB200 on its Blackwell platform during GTC. These chip offerings will significantly enhance operations for NVDA’s AI GPU’s sole maker -TSM.

AMD predicts that the market for AI GPUs will reach $400 billion by 2027, with a CAGR of 70%. TSM has already committed substantial capital expenditures to increase its production capacity and meet customer demands in this expanding market.

TSM’s management anticipates that the fiscal 2024 first-quarter revenue will range from $18.0 billion to $18.8 billion. The company’s gross profit margin could fall between 52% and 54%, while its operating profit margin is expected to range from 40% to 42%. Its 2024 CapEx guidance of $28 billion to $32 billion indicates a strategic shift where the rate of capital spending growth is stabilizing as TSMC capitalizes on its growth opportunities.

TSM plans to manage its capital with a focus on several key objectives: funding organic growth, ensuring profitability, maintaining financial flexibility, and delivering sustainable and increasing cash dividends to shareholders. Owing to diligent capital management, TSM's Board of Directors authorized in November 2023 to increase the cash dividend for the third quarter of 2023 from NT$3 ($0.09) to NT$3.50 ($0.11) per share.

From now on, this will be the new minimum quarterly dividend level. The cash dividend for the third quarter of 2023 will be paid out in April 2024.

Moreover, TSM’s shareholders received a cash dividend of NT$11.25 ($0.35) per share in 2023, and they will receive a minimum of NT$13.5 ($0.42) per share in 2024. In the coming years, the company anticipates a shift in its cash dividend policy, moving from maintaining sustainable dividends to steadily increasing cash dividends per share.

Bottom Line

Investors aiming to capitalize on the AI boom should prioritize investing in companies that play an indispensable role in developing and promoting AI technologies. Focusing on foundational players in the chip industry is crucial as these companies are well-positioned to drive and benefit from AI advancements in the long term. One such promising industry player is TSMC.

Though TSM does not immediately appear as an AI staple, its role in the AI pipeline is paramount and arguably on par with any other enterprise. Data centers rely heavily on GPUs, which serve as the neural center of AI computing systems. The process heavily relies on TSM's exceptional manufacturing processes and the semiconductors that it produces for its client companies.

TSMC’s chief executive officer, C.C. Wei, foresees the company’s AI-centric chip revenue to expand at a CAGR of 50%. By 2027, he projects AI chips to make up a high-teens portion of the company’s revenue.

With its operations well-suited to leverage the ongoing AI wave, TSM’s stock has surged more than 57% over the past six months. Positioned firmly with a proven track record of success, strategic investments, and a flourishing market for AI-based chips, TSM presents an appealing opportunity for investors seeking substantial returns.

TSM’s Demand Woes May Benefit 3 Chip Stocks

Semiconductor sales reached their highest level last year despite witnessing a slowdown during the year's second half. The slowdown was primarily due to the decline in demand from the end-user markets because of macroeconomic headwinds.

According to Gartner, global semiconductor revenues will decline 11.2% in 2023. Popular chipmaker Taiwan Semiconductor Manufacturing Company Limited (TSM) is also witnessing a slowdown in demand. According to sources, the company, to control costs, has asked its major suppliers to delay the delivery of chipmaking equipment.

Although the long-term growth prospects of the semiconductor industry look bright, the near-term headwinds will continue to put pressure on the chip industry in the short term. Gartner’s Practice VP Richard Gordon said, “As economic headwinds persist, weak end-market electronics demand is spreading from consumers to businesses, creating an uncertain investment environment.”

“In addition, an oversupply of chips, which is elevating inventories and reducing chip prices, is accelerating the decline of the semiconductor market this year,” he added. In July, TSM, a major supplier to smartphone giant Apple Inc. (AAPL), forecasted that it would witness a 10% drop in sales in 2023, and its investment spending would be at the lower end of its estimate of $32 billion and $36 billion.

TSM CEO C.C. Wei highlighted that the decline in demand would be mostly due to a tepid recovery in China, soft demand in the end market, and a weak global economic scenario. Although the demand for artificial intelligence (AI) chips is likely to remain strong, it is unlikely to offset the softer demand in the end markets due to declining sales of smartphones, personal computers, laptops, etc.

Degroof Petercam’s analyst Michael Roeg said, “There has been a lot of excitement about artificial intelligence and the implications for the semiconductor industry. However, the strength in demand for AI chips is not strong enough to compensate (for) what is happening in other segments.”

After global demand for consumer electronics spiked during the pandemic, companies had stockpiled chips to meet the high demand. However, as the demand slowed down in the end markets due to high inflation, companies were stuck with excess inventories, and this led to a fall in the demand for chips, followed by a decline in their prices.

TSM’s CFO Wendell Huang said, “Moving into the third quarter 2023, we expect our business to be supported by the strong ramp of our 3-nanomenter technologies, partially offset by customers’ continued inventory adjustment.”

AAPL, a major TSM customer, announced its latest iPhone series with the cutting-edge 3-nanometer chip but did not raise prices, indicating softness in the smartphone market. AAPL is currently facing trouble in a key market like China as the Chinese government banned some government employees from using iPhones at work.

Furthermore, smartphone maker Huawei came up with the Mate 60 series, which utilizes an advanced chip made by Chinese chipmaker SMIC. All these factors might put pressure on iPhone sales this year, piling further pressure on TSM.

Moreover, TSM is facing delays at its Arizona plant. The company was forced to push back production at the plant by a year to 2025 as it faced difficulty recruiting workers and pushback from unions due to its efforts to bring workers from Taiwan. After investing heavily in expanding its capacity, the company is looking at a slower increase in capital expenditure in the coming years.

As TSM’s headwinds are expected to continue, fundamentally stable chip stocks Infineon Technologies AG (IFNNY), STMicroelectronics N.V. (STM), and ChipMOS TECHNOLOGIES INC. (IMOS) might benefit.

Let’s discuss these stocks in detail.

Infineon Technologies AG (IFNNY)

Headquartered in Neubiberg, Germany, IFNNY designs, develops, manufactures, and markets semiconductors and related system solutions worldwide.

On August 3, 2023, IFNNY announced its decision to expand its Kulim fab over and above the original investment announced in February 2022. The company will build the world’s largest 200-millimeter SiC (silicon carbide) Power Fab. The expansion is backed by new design wins in automotive and industrial applications for about five billion euros and about one billion euros in pre-payments.

The company will additionally invest up to €5 billion in Kulim during the second construction phase for Module Three. The investment will lead to an annual SiC revenue potential of about €7 billion by the end of the decade, together with the planned 200-millimeter SiC conversion of Villach and Kulim.

IFNNY’s CEO Jochen Hanebeck said, “The market for silicon carbide shows accelerating growth, not only in automotive but also in a broad range of industrial applications such as solar, energy storage, and high-power EV charging. With the Kulim expansion, we will secure our leadership position in this market.”

IFNNY’s revenue grew at a CAGR of 26.1% over the past three years. Its EBITDA grew at a CAGR of 45.7% over the past three years. In addition, its EPS grew at a CAGR of 96% in the same time frame.

In terms of trailing-12-month net income margin, IFNNY’s 19.13% is 840.7% higher than the 2.03% industry average. Likewise, its 35.32% trailing-12-month EBITDA margin is 285.9% higher than the industry average of 9.15%. Furthermore, the stock’s trailing-12-month Capex/Sales came in at 15.52%, compared to the industry average of 2.42%.

For the third quarter ended June 30, 2023, IFNNY’s revenue increased 13% year-over-year to €4.09 billion ($4.37 billion). Its adjusted gross margin came in at 46.2%, compared to 45.4% in the prior-year quarter. The company’s profit for the period rose 60.7% year-over-year to €831 million ($887.97 million). Also, its adjusted EPS came in at €0.68, representing an increase of 38.8% year-over-year.

Analysts expect IFNNY’s revenue for the quarter ending September 30, 2023, to increase 2% year-over-year to $4.37 billion. It surpassed the consensus EPS estimates in three of the trailing four quarters.

STMicroelectronics N.V. (STM)

Based in Geneva, Switzerland, STM designs, develops, manufactures, and sells semiconductor products in Europe, the Middle East, Africa, the Americas, and the Asia Pacific. The company operates through the Automotive and Discrete Group, Analog, MEMS, and Sensors Group; and Microcontrollers and Digital ICs Group segments.

STM’s revenue grew at a CAGR of 21.6% over the past three years. Its EBIT grew at a CAGR of 65.7% over the past three years. In addition, its net income grew at a CAGR of 69.5% in the same time frame.

In terms of trailing-12-month net income margin, STM’s 27.45% is significantly higher than the 2.03% industry average. Likewise, its 29.78% trailing-12-month EBIT margin is 559.7% higher than the industry average of 4.51%. Furthermore, the stock’s trailing-12-month asset turnover ratio came in at 0.88x, compared to the industry average of 0.62x.

STM’s net revenues for the second quarter ended July 1, 2023, increased 12.7% year-over-year to $4.33 billion. Its net cash from operating activities rose 24.1% year-over-year to $1.31 billion. The company’s net income rose 15.5% year-over-year to $1 billion. Also, its EPS came in at $1.06, representing an increase of 15.2% year-over-year.

Street expects STM’s revenue for the quarter ending September 30, 2023, to increase 1.7% year-over-year to $4.38 billion. Its EPS for fiscal 2023 is expected to increase 3.3% year-over-year to $4.33. It surpassed the Street EPS estimates in three of the trailing four quarters.


Headquartered in Hsinchu, Taiwan, IMOS researches, develops, manufactures, and sells high-integration and high-precision integrated circuits and related assembly and testing services. It operates through Testing, Assembly, Testing, and Assembly for LCD, OLED, and Other Display Panel Driver Semiconductors, Bumping; and Others segments.

IMOS’s total assets grew at a CAGR of 8.7% over the past three years. Its Tang Book Value grew at a CAGR of 6.8% over the past three years. In addition, its revenue grew at a CAGR of 2.9% over the past five years.

In terms of trailing-12-month net income margin, IMOS’ 8.63% is 324.4% higher than the 2.03% industry average. Likewise, its 29.37% trailing-12-month EBITDA margin is 220.9% higher than the industry average of 9.15%. Furthermore, the stock’s trailing-12-month Capex/Sales is 15.32%, higher than the industry average of 2.42%.

For the fiscal second quarter ended June 30, 2023, IMOS’ revenue came in at NT$5.44 billion ($169.84 million). Its net non-operating income came in at NT$222.40 million ($6.94 million. The company’s net profit attributable to equity holders of the company came in at NT$628.50 million ($19.62 million). Also, its EPS came in at NT$0.86.

For the quarter ending September 30, 2023, IMOS’ revenue is expected to increase 6.9% year-over-year to $176.86 million.

This Warren Buffett Holding Has Upside Potential

With retail sales declining more sharply than expected during the holiday month and the third consecutive month of contraction in industrial activity, there is concern on Wall Street that the Federal Reserve may have overcooked it with respect to interest-rate hikes to cool down and contain inflation.

Amid widespread bearish sentiments, it could be wise to bank on fundamentally strong, profitable, and fairly-priced sector-leading businesses, such as Taiwan Semiconductor Manufacturing Company Limited (TSM).

Headquartered in Hsinchu City, Taiwan, TSM provides integrated circuit manufacturing services globally. This involves manufacturing, packaging, testing, and selling integrated circuits and other semiconductor devices.

The super-advanced semiconductor chips that TSM produces are difficult to fabricate due to their high development costs. Hence, this presents a significant barrier to entry into the competition.

On December 29, 2022, TSM held a 3 nanometer (3nm) Volume Production and Capacity Expansion Ceremony at its Fab 18 new construction site in the Southern Taiwan Science Park (STSP).

TSM announced that 3nm technology has successfully entered volume production with good yields. The company estimates that the technology will create end products with a market value of $1.5 trillion within five years of volume production.

On December 6, TSM updated that in addition to its first fab in Arizona, which is scheduled to begin production in 2024, it has also started the construction of a second fab, scheduled to begin production in 2026.

The overall investment for these two fabs will be approximately $40 billion. When complete, TSM Arizona’s two fabs will manufacture over 600,000 wafers annually, with an estimated end-product value of more than $40 billion.

On November 15, it was revealed that Warren Buffett’s Berkshire Hathaway (BRK.B) spent $4.1 billion to acquire a stake in the world’s largest contract chipmaker during the third quarter. According to SEC filings, the fabled conglomerate bought just over 60 million of TSM’s New York-listed American Depositary Shares at an average price of around $68.56.

Mirroring the positive developments, the stock has gained 16.9% over the past month to close the last trading session at $89.47. Continue reading "This Warren Buffett Holding Has Upside Potential"