Wall Street analysts are overwhelmingly bullish on Amazon and Taiwan Semiconductor.
Artificial intelligence (AI) has been the hottest investment theme for nearly two years now, and Nvidia is one of the most popular ways to bring that theme to life. However, the following billionaire hedge fund managers sold their Nvidia shares during the second quarter and moved their capital into two other AI stocks: Amazon. (AMZN -3.06%) and Taiwan Semiconductor (TSM 1.85%).
Ken Griffin of Citadel Advisors sold 9.2 million Nvidia shares, reducing his holdings by 79%. He also added 1.1 million shares of Amazon and 633,897 shares of Taiwan Semiconductor. Amazon is now his largest stock holding, excluding options and index funds. Philippe Laffont of Coatue Management sold 96,963 Nvidia shares, reducing his holding by 1%. He also bought 702,235 shares of Amazon and 1.1 million shares of Taiwan Semiconductor, which currently holds the second and third place respectively.
Of course, the second quarter ended on June 30th, so the transactions detailed above took place several months ago. However, Amazon and Taiwan Semiconductor remain highly recommended by Wall Street.
Of the 65 analysts who follow Amazon, 95% rate the stock as a buy, while the remaining 5% rate it as a hold. The median price target of $220 per share implies an 18% upside from the current share price of $187. Of the 44 analysts who follow Taiwan Semiconductor, 98% rate the stock as a “buy,” while the remaining 2% rate it as a “hold.” The median price target of $209 per ADR implies an upside of 15% from the current price of $181.
Here’s what investors need to know about Amazon and Taiwan Semiconductor.
1.Amazon
Amazon operates the world’s most popular online marketplace in terms of monthly visitors and strengthens its leadership with a robust logistics network. Amazon’s retail dominance will make it the third-largest ad tech company in the U.S., and could surpass second-place Metaplatform by the end of this decade, according to eMarketer.
Beyond retail and advertising, Amazon Web Services (AWS) is a market leader in cloud infrastructure and platform services, which puts the company in a unique position when it comes to artificial intelligence (AI). With the largest community of customers and partners in the public cloud, AWS has more monetization and upsell opportunities than its competitors. And consultancy Gartner recently recognized AWS as a leader in cloud AI developer services.
Amazon reported mixed financial results in the second quarter. Revenue rose 10% to $148 billion, narrowly missing expectations. However, GAAP net income rose 94% to $1.26 per share, beating expectations. The stock price fell on the news, in part because sales growth was slower than expected and management gave a somewhat conservative outlook for the third quarter.
But Amazon has a strong presence in three big markets, and Wall Street expects the company’s revenue to grow 22% annually over the next three years. Therefore, the current valuation of 44x P/E seems relatively reasonable. These numbers yield a PEG ratio of 2, discounting the three-year average of 2.9. Patient investors should consider buying a few shares today.
2. Taiwan Semiconductor Manufacturing Company
Taiwan Semiconductor Manufacturing Company (TSMC) is the world’s largest dedicated chip manufacturer or foundry. The company is bearing the cost burden of other companies’ chip manufacturing. According to Counterpoint Research, TSMC accounted for 62% of foundry revenue in the June quarter, up 4 percentage points year-on-year.
This scale gives the company significant advantages. This supports the aggressive capital investments necessary to keep TSMC at the leading edge of semiconductor manufacturing, also known as process technology. The combination of significant R&D spending and engineering expertise allows the company to consistently produce chips that are smaller, faster, and more power efficient.
According to analysts, TSMC holds more than 90% market share in the most advanced process technologies, the 3-nanometer and 5-nanometer nodes. And management says the company’s 2-nanometer node will reach mass production in 2025. Industry leadership gives TSMC pricing power and makes it the AI chip maker of choice for customers such as Apple, Broadcom, and Nvidia.
TSMC reported strong financial results in the second quarter. Revenue increased 32% to $20.8 billion, and profit increased 30% to $1.48 per ADR. “Our business in the second quarter was supported by strong demand for our industry-leading 3-nanometer and 5-nanometer technologies, but was dampened by continued smartphone seasonality,” said CFO Wendell Huang. “It was canceled out,” he said. He expects to see strong demand for smartphones and AI products in the third quarter.
Wall Street expects TSMC’s revenue to rise 26% annually over the next three years as the AI boom increases demand for high-speed semiconductors. That would make the current valuation of 32.4x P/E seem fair. These numbers yield a PEG ratio of 1.2, discounting the three-year average of 1.6. Investors should feel comfortable buying a few shares today. TSCM stock has doubled the S&P 500 index over the past three years, and I think it will continue to outperform over the next three years.
John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool’s board of directors. Randi Zuckerberg is a former head of market development and spokesperson at Facebook, sister of Meta Platforms CEO Mark Zuckerberg, and a member of the Motley Fool’s board of directors. Trevor Jennewine has held positions at Amazon and Nvidia. The Motley Fool has positions in and recommends Amazon, Apple, Meta Platforms, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and Gartner. The Motley Fool has a disclosure policy.
