Taiwan Semiconductor Manufacturing Stock (TSM -0.61%) The stock is near record highs, and Barclays analyst Simon Coles predicts there is room for further gains next year. The analyst maintained an overweight (buy) rating on the stock last week, but raised his price target to $240 from $215.
Wall Street price targets don’t mean much to long-term investors. But in this case, there is a meaningful catalyst that could drive stock prices higher in the short term: artificial intelligence (AI). Here’s why analysts’ price targets may be right.
Demand for AI chips is unexpected
In its third-quarter earnings call, management said demand for AI server processors, including graphics processing units (GPUs) and other chips used for AI training, is surging. The company expects the revenue contribution from these chips to more than triple for the full year.
Revenue from AI chips is expected to account for mid-teens of revenue in 2024, but TSMC is also seeing strong growth in other areas of its business. Third-quarter revenue increased 36% year over year, and earnings per share increased 54%.
Despite the recent share price rally, its valuation remains attractive. At the time of writing, TSMC’s stock price is 27.1 times this year’s consensus earnings estimate. And using the 2025 consensus forecast, the company’s forward price-to-earnings ratio (P/E) becomes even more attractive at just 21.5. Considering TSMC’s above-average sales and profit growth, this appears to be an unfair discount to the S&P 500’s average forward P/E of 23.9x.
Of course, given the cyclical nature of the chip industry, demand trends can be adverse. However, given recent opportunities in the AI chip market, TSMC should see strong growth beyond 2025, making the stock a solid buy.
John Ballard has no position in any stocks mentioned. The Motley Fool owns a position in and recommends Taiwan Semiconductor Manufacturing. The Motley Fool recommends Barclays Plc. The Motley Fool has a disclosure policy.
