This 'AI Royalty' Stock Looks Priced to Buy

The world’s largest semiconductor foundry, Taiwan Semiconductor Manufacturing (NYSE: TSM), is an essential lynchpin for so many industries and companies that it’s actually kind of hard to put things into perspective. Calling TSMC a critical supplier doesn’t do it justice.

The chips that the company produces are in everything when it comes to advanced electronics — and I mean everything. Data centers, artificial intelligence infrastructure, iPhones, Teslas, smart TVs — all of these rely on chips that, while often designed by other companies, are manufactured by TSMC.

No TSMC, no Nvidia. No TSMC, no AI. You get the picture.

TSM’s returns have lagged those of big AI names like Nvidia (NASDAQ: NVDA) and Palantir (NASDAQ: PLTR). It’s essentially the picks and shovels play for AI. The market just hasn’t rewarded TSM holders to the extent that it has rewarded investors who bought into AI companies at the right time.

There’s a strong argument to be made that this will change, however.

First, let’s delineate TSMC’s key advantage — it has a strong moat. Research from Taiwanese market intelligence firm TrendForce from last week has the company’s market share pegged at 67.6%. 

Moreover, the foundry has an even greater edge when it comes to the most advanced, 5nm and 3nm chips. While it’s difficult to quantify, and the word decade tends to get thrown around a lot, a more realistic view is that TSMC is 3 to 5 years ahead of key competitors, depending on what specific part of chip manufacturing we’re talking about.

Some geopolitical concerns are present on the back of the contentious issue of Taiwan — but the company has taken steps to open fabs in Arizona and Japan, and a R&D center in Germany, so this is becoming less impactful by the day.

So, to summarize — it’s an essential background participant in booming industries, has a dominant position in its market, and a technological advantage that most likely won’t end any time soon.

Put together, that makes up a strong argument as to why you should buy TSM shares — but, it’s always a question of whether or not the price is right for the value that you’re getting.

And at current prices, the deal would be more than fair. The stock is trading at a price-to-earnings (P/E) ratio of 25.9x, below the wider market’s 31.17x average.

That’s just one piece of the puzzle, however. Our proprietary quant rating system, Zen Ratings, ranks TSM in the top 15% of stocks based on 115 proprietary factors that correlate with outsized returns.

This gives TSM shares a Zen Rating of A, which has historically corresponded with an average annual return of 32.52%.

Those 115 factors are divided into 7 Component Grade ratings — and we’ll have to take a closer look to ascertain TSM’s core strengths. 

In terms of Value, it’s rated in the 57th percentile — in simple terms, equivalent to or better than 57% of equities. That’s not a huge edge — but it is an edge, and with the unique advantages/moats we’ve covered, it’s still an enticing valuation on the whole.

Our rating system has placed TSM in the top 8% of stocks in terms of its Artificial Intelligence rating. This means that a neural network trained on more than 20 years of data has picked up on subtle signs that hint at outperformance,

However, Financials are the star of the show — when it comes to the balance sheet, TSM ranks in the top 3% of stocks. Profit margins currently stand at 41.2% — and short-term assets of $110.78 billion exceed the sum of short-term liabilities ($46.35 billion) and long-term liabilities ($37.48 billion).

So, what does Wall Street say? TSM is a consensus Strong Buy, with 2 Strong Buy ratings and 1 Buy rating. The average 12-month price forecast implies an 11.32% upside.

If AI keeps proliferating and truly ends up being the transformative force it is being painted as, it wouldn’t surprise me if the one chipmaker in the world that has the technology and scale to keep up with demand outperforms analyst estimates.

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