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Taiwan Semi (TSM): Will this Hardware Stock Grow Faster than the Market?

We recently compiled a list of the 15 Best Hardware Stocks According to Hedge Funds. In this article, we are going to take a look at where Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) stands against the other hardware stocks.

With the first half of 2024 nearly over, artificial intelligence continues to play a dominant role in the stock market. Stocks that either design semiconductors that are used for AI applications, or those that use them to either streamline their internal operations such as coding or offer products to customers have also made significant gains. These show the optimism in Wall Street for accelerated computing technologies, which are collectively called artificial intelligence.

In fact, the impact of AI has been so strong that not only has it upended the status quo of the most valuable firms in terms of market capitalization, but it also allowed some of the top AI companies to post triple digit percentage share price returns over the course of the past twelve months. Some of the top performing AI stocks are up by 213% over the past twelve months and have appreciated by 773% since November 2022. Back then, the stock market was whimpering in the aftermath of rapid interest rate hikes by the Federal Reserve, which had hit technology stocks particularly hard since they benefit from a fast growth and low rate environment.

However, AI's impact on the stock market has fueled the triple digit percentage gains in some stocks since then. At the same time, it has also meant that major indexes continue to demonstrate robust performance that is fueled by the share price performance of mega cap technology stocks.

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In 2024, the market has moved forward from investing in AI companies that can change the world with their hardware or software to evaluating whether these firms are delivering. The first quarter of the 2024 earnings season was the clearest example of this phenomenon, and it saw Wall Street take an unforgiving approach to large and small firms that presented even the slightest hint of being unable to either grow their revenues by targeting AI or control the costs of investing in the new technologies.

Within the AI industry, there are different categories of firms. Most of these, such as OpenAI, operate on the software side. This industry subsegment develops applications such as chat bots and other assistants along with expanding the use of AI to existing software such as image editing tools. AI hardware companies power these applications, and when compared to the software firms, not only do they command stable valuations, but they also see investors take comfort in the fact that the demand for their products is far more stable and predictable when compared to software demand. Recently Goldman Sachs published a bullish report on hardware stocks due to AI, which we covered in 15 Best Hardware Stocks According To Goldman. In this article we are going to approach the same theme from a different angle and there are vast differences between both rankings of hardware stocks.

Our Methodology

To make our list of the top hedge fund hardware stock picks, we ranked personal computing, semiconductor, and computer hardware by the number of hedge funds that had bought the shares in Q1 2024. Out of these, the stocks with the highest number of hedge fund investors were selected. Basically our article listed the best hardware stocks to buy according to the 900+ equity hedge funds tracked by Insider Monkey. Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

Is TSM Stock a Good Long Term Buy?
Is TSM Stock a Good Long Term Buy?

A close-up of a complex network of integrated circuits used in logic semiconductors.

Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM)

Number of Hedge Fund Shareholders In Q1 2024: 135

Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) is the world's largest contract chip manufacturer that makes AI chips for firms like AMD and NVIDIA. A growth in AI shipments worldwide proved to be quite a catalyst for the firm in May 2024. During May, Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM)'s revenue grew by a strong 30% to sit at $7.1 billion. This growth comes just as ASML, the world's leading chip manufacturing equipment company, confirmed that it will ship its advanced high NA EUV scanner to TSMC. These machines are crucial for future manufacturing technologies, and TSMC plans to upgrade its roadmap to 2-nanometer chips in 2025.

During Q1 2024, 135 hedge funds covered by Insider Monkey's research were Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM)'s stakeholders. Ken Fisher's Fisher Asset Management owned the most valuable stake which was worth $3.9 billion.

Looking at the future, Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) is trading at a forward P/E of 26, implying that growth should be only slightly faster than the market's. Baron Funds remained convinced for the Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM)'s leadership potential in its Q1 2024 investor letter as it stated:

Semiconductor giant Taiwan Semiconductor Manufacturing Company Limited contributed in the first quarter due to investor expectations for a continued strong cyclical recovery in semiconductors and significant incremental demand for AI chips. We retain conviction that Taiwan Semiconductor’s technological leadership, pricing power, and exposure to secular growth markets, including high-performance computing, automotive, 5G, and IoT, will allow the company to sustain strong double- digit earnings growth over the next several years.

Overall TSM ranks 3rd on our list of the best hardware stocks to buy. You can visit 15 Best Hardware Stocks According to Hedge Funds to see the other hardware stocks that are on hedge funds’ radar. While we acknowledge the potential of TSM as an AI play, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than TSM but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

 

READ NEXT: Analyst Sees a New $25 Billion "Opportunity" for NVIDIA and Jim Cramer is Recommending These 10 Stocks in June.

 

Disclosure: None. This article is originally published at Insider Monkey.