Taiwan Semiconductor Manufacturing Co., Ltd. (NYSE:TSMCTaiwan Semiconductor (TSMC), the world’s largest semiconductor manufacturer, announced very strong second-quarter results and is clearly benefiting greatly from the spread of artificial intelligence. Furthermore, the company has several strong positive factors, so Taiwan Semiconductor stock is not overvalued. However, investors should be aware that this stock has more geopolitical risk than any other popular stock in the U.S. stock market.
Taking the latter into account, I rate the stock a buy for risk-tolerant value investors looking for exposure to a major semiconductor manufacturer, but I would not recommend investors hold Taiwan Semiconductor shares for more than 1% to 2% of their overall portfolio.
Strong second quarter results and modest valuation
Last quarter, Taiwan Semiconductor saw very impressive revenue growth of $20.8 billion, up 33% year over year, and earnings per share jumped to $1.48 from $1.14 in the second quarter of 2023. The chipmaker also raised its 2024 sales growth outlook to over 25% from a previous range of 20-25%.
“Over the past three months, compared to three months ago, we have seen increased demand from our customers for AI and high-end smartphone-related needs,” CEO CC Wei said during the company’s second-quarter earnings call.
Additionally, revenue from the company’s high-performance computing division, which makes the AI chips used in data centers, grew an astounding 28% in the second quarter compared to the first.
In terms of valuation, TSM stock trades at just 14.7 times enterprise value to EBITDA, and 24 times forward earnings — both fairly low numbers considering the chipmaker’s rapid growth.
Multiple powerful positive catalysts
Of course, Taiwan Semiconductor is well positioned to benefit from the growing use of AI chips. Nvidia (NASDAQ:NVDA) AI chips in particular add another dimension: Historically, Nvidia has outsourced chip manufacturing to Taiwan Semiconductor Corp. Analysts on average expect Nvidia’s sales to rise 98% this year and another 36% in 2025.
Additionally, Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:Amazon) and Alphabet (NASDAQ:Google, Google) starts designing most of its AI chips in-house, it will likely follow Nvidia’s lead and have Taiwan Semiconductor manufacture the majority of its chips.
Additionally, Apple (NASDAQ:AAPLIf Apple buys a lot of Taiwan Semiconductor’s chips, the Taiwanese company will benefit greatly from increased demand for iPhones after Apple adds AI capabilities to the device. Moreover, iPhones with AI tools will likely require significantly more advanced chips than previous iPhones.
Finally, Taiwan Semiconductor noted that demand for chips is increasing due to the popularity of “connected devices, smart cars, virtual reality/augmented reality, and intelligent manufacturing.”
Major geopolitical risks
China considers Taiwan, where most of Taiwan Semiconductor’s factories are located, to be part of China. Furthermore, China has recently engaged in a number of hostile acts against Taiwan, including a “mock blockade” and a “mock amphibious attack” on Taiwan, as well as missile tests by Beijing.
Meanwhile, Chinese President Xi Jinping has in the past signaled an interest in invading Taiwan, and China has recently sought to strengthen its control over the South China Sea to counter U.S. defence of Taiwan in the event of a Chinese invasion.
If former President Donald Trump is re-elected in November, I would not be too surprised if China takes some fairly aggressive action before he takes office in January. Trump is known for being tough on China. He is seen in Beijing as more likely to push back against any moves than the Biden administration would. Of course, any aggressive action by China against Taiwan could cause a significant drop in Taiwan Semiconductor’s stock price.
As of the publication date of this article, Larry Ramer held a long position in AMZN. Opinions expressed in this article are those of the author and follow InvestorPlace.com’s publishing guidelines.
On the date of publication, the editor in charge did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
