TSM AI Stock Analysis - Taiwan Semiconductor ($TSM) as an Artificial Intelligence Investment

Is Taiwan Semi the right AI stock for you? In this episode we discuss Taiwan Semiconductor Manufacturing Company (TSM), the top global semiconductor foundry. TSM's impressive earnings report and dominant position in chip manufacturing make it one of the core AI companies to own. We explain the concept of earnings per share (EPS) and highlight TSM's financial performance. We discuss the role of $TSM in chip manufacturing and also address the risks and concerns surrounding TSM, such as competition, rising costs, and the geopolitical situation. We touch on Intel's attempt to catch up with TSM in AI and share our bullish outlook on the company. The episode concludes with a discussion on short-term trading and the market outlook for AI investing and AI stocks.

TSM as an AI Stock - Episode 3 Outline:

0:00 Introduction to Taiwan Semiconductor Manufacturing Company (TSM)
2:20 Impressive Earnings Report
4:05 TSMC as a Core AI Company
6:21 Understanding Earnings Per Share (EPS) and TSMC's Finances
9:04 TSM's Role in Chip Manufacturing
10:30 Bullish Outlook on TSM
12:10 Risks and Concerns: Competition, Rising Costs, and Geopolitical Situation
21:04 Short-Term Trading and Market Outlook

What do you think of TSM as an investment in artificial intelligence? Is Taiwan Semi ($TSM) a top AI stock?

Transcript

James (00:00.046)
Welcome to the investing and intelligence podcast. I think I started to welcome to the investing and intelligence podcast where we talk about artificial intelligence companies, stocks and trading. I'm James here with my cohost, Kai. And today we will be talking about Taiwan semiconductor. I want to remind you that the opinions expressed on this podcast are just that opinions. They should not be taken as specific advice to invest in a particular way.

Taiwan Semiconductor Manufacturing Company is the top global semiconductor foundry founded in 1987 in Taiwan. It manufactures chips for tech companies, enabling advanced electronics in various sectors. TSMC plays a pivotal role in the semiconductor supply chain, notably outpacing rivals like Intel in foundry services and advanced process technologies. So in a moment, we will cover AI stock TSM or TSMC in depth, but we start with...

this week's 30 seconds in AI. DevOn introduces a new AI software developer while ServiceNow introduces, DevOn introduces a new software, okay, let me start that over. In a moment, we will cover AI stock TSM in depth, but we start with this week's 30 seconds in AI. DevOn introduces a new AI software developer while ServiceNow announces new medical AI tools.

Kai (01:05.847)
I'm sorry.

James (01:20.334)
Apple is negotiating with Google to lease their AI technology. Startup Figure introduces a new robot that uses chat GBT and surpasses Tesla's humanoid robot in dexterity. NVIDIA introduces new GPUs at its developer conference. Wall Street expert Adam Parker says it's unrealistic to not own NVIDIA, hoping for a pullback, saying anyone who thinks they know more than the hundreds of buy -side analysts is playing God.

Kai (01:49.399)
That's a new segment there, Dr. James.

James (01:52.686)
That is a new segment there. So let's go ahead and jump into TSM. So Taiwan Semi reported earlier on in the season in most companies. They were one of the first tech companies to report. So they closed out their fiscal year 2023 with their January 18 report. And we'll talk about the report in a second. I just wanted to mention that for disclosures, I do own TSM. It's about 6 % of my AI portfolio.

a smaller percent of my overall portfolio. And once again, we are in their first quarter now. So looking straight at their earnings report, it was pretty impressive. It looks like they beat revenue estimate. It looks like they beat on pretty much everything. So I see beat revenue estimate by 0 .3%, beat the guide by 2 .2%. They beat their margin estimate.

beat gap EPS, beat revenue. Oh, so for the next quarter guidance, they beat revenue estimate by 0 .9%. They beat the margin estimate. They beat gap GPM estimate. So it looks like pretty good numbers. Now, although I see this on the stock market nerd report, this is from a guy named Brad on Twitter that does these reports.

Kai (02:50.793)
you

James (03:08.398)
From what I understood on their earnings call, I think they actually mentioned that they had a slight decrease in one of their margins figures. So they're explaining some of the difficulty they've had over the past year as a cyclical issue. And they're stating that also they're investing a lot in opening these new plants right now. So they're saying they've had some headwinds from opening the factories in Japan and also the factory.

in Arizona they're working on. I also think they're waiting on a bit of money from the US government for their Arizona factory, but they're reporting those as headwinds, as costs that have factored into their margins and will continue to factor in, although they're expecting better margins in the future, especially a year from now, several quarters from now. So pretty good earnings report. And I would say that TSM is one of the four or five core AI companies that everyone wants to own right now. So Nvidia, SMCI,

ASML, Microsoft, and TSM. Those are really the big five that everyone should have in their portfolio. They are the designated winners of AI and they will continue to win in the coming years as AI ramps up. So going from there, there are a lot of issues that can be discussed surrounding TSM like the threat from Intel and the threat from China. Those are two of the biggest factors. But just looking at the overall financial situation,

Kai, what do you think about their finances in general? What do you think about their earnings, about their revenue? What's your opinion on TSA?

Kai (04:47.159)
Yeah, I mean, this may be something you and I both agree on for once, although I don't agree potentially with your previous statement there, James, as far as all the big hitters that I would agree on and where I would put my stock in potentially AI companies. I do agree that those are very big AI plays. I think they're good AI plays or investments, so to speak. Although I think, for example, SMCI is at an astronomical evaluation versus TSM.

Um, is actually at the 21 day, uh, moving average right now. It has shown consistent EPS growth 15 % annually, I think for about the last 10 years. Um, it's got an excellent, excellent share book value, book value per share growth, um, over the last 10 years. And so from a, from a company standpoint, it's rock solid. Also, it's when you're investing in a company and I did want it to take a, take a few seconds to kind of get down to a few basics. And so when you're investing in a company.

You want to understand what the company does. And so if you can, James, just explain, explain from a very basic standpoint, what TSM, Stock Ticker Taiwan Semi does. And then also just go ahead and explain. We've talked a lot about EPS and so some people may watch the show and say, oh, this is very complex, but just when we look at EPS growth or quarterly EPS growth or yearly EPS growth, just define what EPS or earnings per share is. And then also,

go ahead and explain what Taiwan Semiconductor does.

James (06:21.134)
Yeah, absolutely. So for that's a lot of questions, a lot to handle there. But so for earnings per share, what we call the bottom line takes in consideration their costs. So revenue, which is what they call the top line doesn't take into consideration the cost and really it's not really the profit. So the top line of the revenue is just their gross revenue, how much money they made for that quarter. Whereas the EPS,

factors in their cost and really as a calculation of their profit. So you could call bottom line or EPS their profit top line, you could call their gross revenue.

Kai (06:54.999)
Excellent. Yeah.

Kai (06:59.319)
Excellent. Yeah, it's just sales minus cost essentially. And I think, correct me if I'm wrong, even dividends come out of that cost or taxes, et cetera. So EPS is just a good metric to look and see whether a company is profitable or not. And so when James and I are talking about EPS growth, it's basically saying this company is profitable quarter after quarter, year after year and grows in that number.

Um, the revenue for TSM was around $20 billion. And so this is where I disagree somewhat with James as far as potentially, um, some of the other companies, but this is, this is billions and billions of dollars of revenue versus we talked about SMCI last week and it wasn't 20 billion of revenue a quarter. So we're you're expecting SMCI to.

jump off the railroad tracks and fly into the sky. And I'm thinking that that's potentially impossible for the train that is SMCI to do. In this instance, Taiwan Zemi has shown consistent EPS growth as well as revenue growth. So the question I asked you before that though was,

James (07:58.126)
you

James (08:06.35)
I don't know if I can agree with you there. If we look at the EPS here, which we have in front of us, we see it was higher than 182 fiscal year 22 quarter four. So Q4 of fiscal year 2022, they were actually earning significantly more than they were now and more than they were a few quarters ago. So I don't know if I can agree with you. What I would say here is that we see a cyclicality. We see a challenging 2022 and 2023. So Taiwan Semi,

accounts for 60 % of the global semiconductor manufacturing, they are exposed to some cyclicality in the various semiconductor markets. So I don't know if I can say that we have consistent growth, but I think you were going to comment on the big five as a whole. So I'd be happy to respond to what you were going to say about that.

Kai (08:52.919)
No, the other question I wanted you to answer is just in general for our audiences. What is Taiwan semi do? And from a basic level, what does Taiwan semi do and what are they selling?

James (09:04.494)
Yeah, absolutely. So they actually manufacture chips and chips are in just about everything nowadays. So they manufacture chips that go into cars. They manufacture chips that go into computers. They manufacture chips that go into smartphones. And Apple is one of their biggest customers. So just to give some more granularity into that, Apple's M1 and M2 chips, which went into prior MacBook Airs and MacBook Pros, used their five nanometer chip.

but the M3 chip, the brand new chip they're putting into their latest model MacBook Pros and MacBook Airs actually uses TSM's new three nanometer chip, which they're just now rolling out. And I can give a little more info on that if you're curious, but to summarize my answer, they just manufacture chips. That's what they do.

Kai (09:50.711)
Yeah. Semiconductors are needed. Electric vehicles, they're in electric vehicles as well as the chips that run. I think they're one of the Qualcomm is one of the big purchasers of Taiwan Semi. One of the reasons why I like Taiwan TSM, Taiwan Semiconductors is because you can see 10 years of a history on this company versus some of the other AI plays. In video, for example, it's only three years that we're looking at here. Here we see a picture of 10 years of EPS growth or

Book value for share growth revenue growth, etc So James and I can agree we like this company. Are you bullish on this company in the short term James?

James (10:30.734)
Yeah, I'm definitely bullish on this company. I think they started in 1987, if I remember correctly. So you're right, they've been around for a long time. And more importantly, they have taken market share from Intel. They are the leader. So Taiwan as a nation produces 90 % of the chips used in the world, which could be a problem. And Taiwan semiconductor produces roughly 60%. So they have roughly 60 % dominance in the manufacturing of chips for the world. So.

I am very, very bullish, especially with AI. So that's really what we're focused on here. Now they definitely are hitting some costs, some bumps in the road due to opening the Japan plant and the Arizona plant. From what I understand, they're kind of waiting on the U .S. government to release certain funds for their Arizona plant, but they're hoping to manufacture their latest chip, which is actually a two nanometer. So the lower the number on the nanometers for the chips, the faster and more efficient they are.

So the two nanometer will be their best chip yet. And they're gonna manufacture those, I understand in Arizona also, although mostly in Taiwan, but not in Japan and not in Europe. So in Germany, they're also opening a new factory in Germany. And that factory in Germany is gonna focus on automotive chips, but go ahead, Kai.

Kai (11:42.135)
So you're long on TSM. So by long also, what I'd like to kind of point out is means that you would invest in or purchase a share of TSM and then expect that share to rise in the future, whether that's three months, a year, two years, correct?

James (11:50.862)
you

Yeah, and you know, I haven't done I actually haven't done a price target on TSM. We could calculate one quickly. But do you have a price target in mind for TSM? And I think I didn't hear from you earlier. Do you actually own TSM?

Kai (12:09.367)
No, I, so the interest I wanted to know I don't currently own, I did own TSM. It's currently at the 21 day moving average. So I had previously had taken profits on the TSM that I own. I plan to purchase more TSM. I'm certainly, I'm in this waiting period. I want to see what the Fed does this week, which I want to hear you comment on, but I see three big issues with TSM, okay? So.

I'm long on TSM as well. However, I see three negatives and I'm one of the, one of those you've alluded to twice, which is Intel. And so number one, my number one negative is the competitors. I think that is the most realistic negative. I think Intel and Samsung are also trying to catch up in regards to competition and getting in the semiconductor game. They're already in the game, but trying to catch up. And so I think TSM will face in the future.

maybe that's two years, three years from now, competition, number one. Number two, you also alluded to this as the rising cost. And so what goes into EPS is sales minus cost. And I think that over the last couple of years, we've seen inflationary costs, for example, in Ukraine or that have...

raised that portion of even though the revenue may stay high, their cost has increased. And so I don't like that. I think that's a significant headwind. I don't think that's as significant as Samsung and Intel. But the third reason, which I'd like to really get your view on is the geopolitical situation. And I think the most real risk to TSM as far as whether I'd want to invest in them in the future is the rising competition and cost. But the...

factor I'd like to hear you address is the geopolitical situation, which is the most unrealistic issue right now, but obviously probably the biggest threat if that were to happen as a negative to going long on TSM. What are your thoughts on that?

James (14:12.75)
Yeah, I don't think that the geopolitical thing is the biggest concern right now. A lot of experts think that China could make a move on Taiwan in the next 10 years. As of today, it's not a big concern for me as an investor in NTSM. But what's, so I guess what I would say is most...

Kai (14:31.031)
You said one thing there though, James, you said one thing, the experts. So the experts, do you think the experts are gonna be the best at predicting whether China goes ahead and invades Taiwan in the future? I mean, I think the one thing that experts have taught us in the last two to three years is that there's no such thing as experts in regards to some of this stuff.

James (14:49.39)
I think the biggest concern was that the weakness in China could give China a reason to invade Taiwan as a distraction from their economic problems. That doesn't seem to be happening. They seem to be finding some other ways to improve their economy in the short term. So I would say once again, that's not also just with Ukraine, what the world has shown here, what the Western world has shown to the China, Russia, North Korea axis is that essentially we're going to fund a

smaller nation that is an ally of ours if they are attacked. And so I don't think that we've given a green flag to China to invade Taiwan. Now there is debate on whether or not there could be more of a green flag when Trump comes in if he wins the election, but I don't necessarily think so because he's been tough on China in the past. So all of that is speculation, is politics. But what I can tell you as far as competition is that TSM is significantly ahead of Intel.

Now Intel is trying to catch up, actually it's their specific goal to catch up by 2025. They're hoping to take back dominance and semiconductors by 2025 and they're introducing a chip which ironically is just 0 .02 nanometer. So it's a 1 .8 nanometer, so 0 .2 nanometers smaller than TSM's two nanometer chip. So they're introducing a slightly smaller chip and they've come up with a new way to manufacture this chip in...

in cooperation with ASML. And they're trying to say that they expect this chip to outperform TSM. So TSM was asked that on the conference call. The CEO doesn't seem to have any doubts about their ability to dominate. And I wanted to just play just 30 seconds from the conference call here.

James (16:44.142)
you

James (16:50.094)
Were you able to hear that, Kai?

Kai (16:52.599)
Yeah, I was. So it's very interesting. I'd have two comments in regards to what you just alluded to. And so one thing when I invest in a company, and this is where I'm bullish on TSM. Okay. Let me just state that upfront. But one thing that I, when I invest in a company, I ask in five to 10 years, is this company going to be around? For example, let's use Apple as an example. So in five to 10 years, I expect people to still be using their iPhones. Okay. In TSM, I think there's a big question.

James (17:02.094)
you

Kai (17:22.423)
because I think we're highly incentivized that in three to five years, we need to start producing semiconductors or purchasing semiconductors outside of Taiwan. Number one. Number two, I heard you say that the geopolitical risk is less because of we're funding the war in Ukraine. So therefore China is more deterred because of our funding of the war in Ukraine. I actually disagree wholeheartedly with all of that. I think that...

China is emboldened like the rest of the world right now in regards to America's weak foreign policy. And so if I am China, and this is where I think the heck with the experts, because if I am China, and I think that Trump is going to win the...

James (17:56.27)
you

Kai (18:11.511)
and invade Taiwan prior to the election. And so one of the significant, although extremely unlikely risks, and I am not here saying that China is going to invade Taiwan. I'm just saying it's a real, a realistic consideration to take into account when investing in a company, as well as depends on maybe how much of your portfolio or what you're willing to risk, because that is a very real scenario, although unlikely.

James (18:34.862)
you

Kai (18:41.265)
So.

James (18:42.382)
Yeah, China's aggressive military posture towards Taiwan is concerning. So supposedly they've sent a record number of fighter jets into Taiwanese airspace in the past months. But there's this idea and I've just pulled up a video Vice News just, I believe a week ago did a report. You see somebody with a gun here. It's a, I think a Taiwanese soldier training. Um, so everyone's talking about this right now and it's a big issue, but there's this concept of the silicone shield, which they talked about in this specific video.

It's the idea that because Taiwan produces 90 % of the world's chips, that the Western world wants to protect them. And the Western wants, once we want to hold up their ability to defend themselves. So you're right. If, if China was to overtake Taiwan, it could be catastrophic. I mean, that'd be a 210 billion, uh, yeah, it's $210 billion in revenue that was actually lost in the automotive sector because of the chip shortages during COVID. So,

Kai (19:37.623)
you

James (19:42.45)
chips are critical to pretty much everything we do nowadays. Now the US Chips and Science Act, which is what the Biden administration

of chips in the US allocates 50 billion to our national semiconductor manufacturing abilities. And I believe that our main goal is to partner with organizations like TSM in doing that. So Intel, if you're concerned about China invading Taiwan, Intel is a better investment for you. And Intel has built up their, so Intel manufactures most of their chips in the US. They have factories around the world, but Intel does most of their manufacturing.

So if that's your biggest concern, then buy some Intel. I'd prefer to invest in the leader in manufacturing of chips. I'd prefer to invest in the one that Apple chooses, that Nvidia chooses. I think they're going to do better. And China's invasion of the country where they're headquartered isn't as big of a concern for me, especially considering that they are opening these plants in Arizona and in Japan now. So for me, it's not as big of a concern. But once again, for every investor, they have their own risk.

Kai (20:24.951)
. . .

Kai (20:37.079)
you

Kai (20:49.691)
Yeah.

James (20:52.878)
We should wrap up though, but I think we covered some good info on TSM and I hope this kind of gives some insights to the average investor on whether or not TSM is right for them.

Kai (21:03.063)
Yeah, exactly. And I really enjoy these debates and these discussions. And this is where it becomes a personal choice and the risk tolerance that you have. This is obviously a good company, obviously good revenue. They produce a product that's needed. And I think it's at a pretty good value right now. I plan to trade TSM, but I plan, I'm not bullish in the five to 10 year because of my risk tolerance. However,

We are in a bull market and it's at its 21 day moving average. So it's a stock right now to keep your eye on. And it's a stock right now that definitely I'm bullish about in the next four to six months. And so great AI play. What do you think about the market? The Fed, the Fed is speaking this week, James really quick. And then also we're in a bull market. So what do you think about TSM just in the next three to six months trading it? You know, are you just holding it for the next five years? Are you trading it kind of on its highs and lows? What do you do?

James (21:34.688)
you

James (22:00.206)
get as an investment. When I did their price talk,

Kai (22:00.951)
you

James (22:04.782)
like the price target for the high estimate for this year is around $100 and it's already above that. So TSM for me is a growth story and it's kind of like we said for Arista, the AI wealth effect hasn't really hit TSM yet, just like it hasn't really hit Arista. They're just getting underway and also they're introducing these new two nanometer chips in 2025. So I think most of the growth is not coming in the next two quarters in TSM. I think it's coming in the next two years. So

Kai (22:32.055)
you

James (22:34.67)
looking forward to that and I'm holding it. I'm not trying to trade. This is not a trading vehicle for me. As far as the overall economy and where we sit this week, there are two big risks for the Fed meeting. Risk number one is that they move their cuts from three cuts for this year to two cuts. So if the dot plot moves in a way that they take out one of the cuts planned for this year, that's going to send the market down. Also, there's always the risk that they could just say something that spooks the market. That's the second risk, but I'm not too concerned.

Kai (22:48.151)
. .

James (23:03.062)
about those things. I do think rates are going to be higher. So if the tenure starts to move up, we're going to see the same pressure on stocks that we saw last year. And whether or not we're in a bull market might actually come into question. I prefer no landing. That sounds better than both of those two options.

Kai (23:11.703)
Last question, do you prefer hot or sticky in regards to inflation, James?

Kai (23:22.135)
Well, we got the Fed this week, guys. We really appreciate you joining. And I would love to, you know, I think this is a great company to look at. Honestly, it's a great company. Bullish on it. I like, I James is very wise in his approach, so.

James (23:37.686)
Awesome. Well, great. Well, thank you to everyone for listening to our podcast. Please give us a rating review or a like on YouTube or a comment. And we'll be back in the next episode to cover AI Small Caps. You can find all our holdings and trades at investingintel .ai. Thanks so much, Kai. We'll see you next time.