Taiwan Semiconductor Manufacturing (NYSE:TSM), the world’s largest chip manufacturer, reported very strong second-quarter results and is clearly benefiting tremendously from the proliferation of artificial intelligence. Moreover, the valuation of Taiwan Semiconductor stock is undemanding while the firm has multiple, strong, positive catalysts. But investors should be aware the stock does pose more geopolitical risk than any other popular stock in the U.S. equities market.
Given the latter point, I rate the shares a buy for risk-tolerant value investors looking for exposure to major chipmakers. However, I would not recommend that investors make Taiwan Semiconductor stock more than 1% to 2% of their overall portfolios.
Strong Q2 Results and an Undemanding Valuation
Last quarter, Taiwan Semiconductor’s revenue jumped a very impressive 33% versus the same period a year earlier to $20.8 billion. Its earnings per share soared to $1.48 versus $1.14 in Q2 of 2023. Also importantly, the chip maker increased its 2024 sales growth guidance to over 25% versus 20% to 25% previously.
“Over the past three months, we have observed strong AI and high-end smartphone related demand from our customers, as compared to three months ago,”CEO C. C. Wei said on the company’s Q2 earnings call.
Moreover, the revenue of the firm’s High Performance Computing unit, which manufactures the AI chips used by data centers, soared an incredible 28% in Q2 compared with Q1.
On the valuation front, TSM stock has an enterprise value-to-EBITDA ratio of just 14.7 times. It also has a forward price-to-earnings ratio of 24 times. Both are quite low, in light of the chipmaker’s very rapid growth.
Multiple, Strong, Positive Catalysts
Of course, Taiwan Semiconductor is well-positioned to benefit tremendously from increased utilization of AI chips in general. The rapidly rising consumption of Nvidia’s (NASDAQ:NVDA) AI chips in particular adds another dimension. Historically, Nvidia has paid Taiwan Semiconductor to manufacture its chips. Analysts, on average, expect Nvidia’s top line to soar 98% this year before climbing another 36% in 2025.
Moreover, even if Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOG, GOOGL) start designing large percentages of their own AI chips, they are likely to follow in Nvidia’s footsteps and use Taiwan Semiconductor to manufacture most of their chips.
Further, with Apple (NASDAQ:AAPL) buying a huge amount of Taiwan Semiconductor’s chips, the Taiwanese firm is likely to get a significant boost from the increased demand for iPhones that will occur after Apple adds AI capabilities to the devices. Moreover, the iPhones equipped with AI tools will probably require significantly more advanced chips than their predecessors.
Finally, Taiwan Semiconductor pointed out the proliferation of “connected devices, smart cars, virtual reality/augmented reality, and intelligent manufacturing” is increasing the demand for chips.
Major Geopolitical Risks
China views Taiwan, where most of Taiwan Semiconductor’s factories are located, as being part of China. Moreover, China recently carried out a number of hostile actions towards Taiwan. It launched a “simulated blockade,” a “simulated amphibious attack” of the island and the test firing of missiles by Beijing.
Meanwhile, Chinese President Xi Jingping has indicated in the past he would be interested in invading Taiwan. And China recently has been looking to obtain greater control over the South China Sea in order to counter any U.S. defense of the island in the event of a Chinese invasion.
If former President Donald Trump is reelected in November, I would not be very surprised if China took significant, aggressive actions before he takes office in January. That’s because Trump is known for being tough on Chin. He is likely seen in Beijing as being much more likely to strongly counter any moves than the Biden administration. Of course, aggressive moves by China towards Taiwan could cause Taiwan Semiconductor stock to fall meaningfully.
On the date of publication, Larry Ramer held a long position in AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
