As an investor, watching the investment habits of billionaire hedge fund managers can serve two purposes. First, it can spark new investment ideas by drawing attention to companies you might not have considered. Second, it can help confirm investment decisions already made.
Chase Coleman and his team at Tiger Global Management recently raised a hedge fund stake in a popular way to invest in the artificial intelligence (AI) arms race: Taiwanese semiconductor manufacturing (NYSE: TSM)which is commonly referred to as TSMC.
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Tiger Global Management grew its stake in the business by nearly 20% in the third quarter and now owns 3.63 million shares (2.8% of its total portfolio), valued at $671 million. The fact that a hedge fund is still buying suggests that there may still be time for others to buy what is considered expensive by some financial metrics.
It’s the fourth quarter, so the question is whether there’s still time to buy TSMC. Let’s take a closer look and see if we can find the answer.
TSMC is the world’s largest semiconductor chip manufacturer, serving as a manufacturer for several of the world’s largest technology companies and chip developers. Almost every high-tech company uses chips manufactured by TSMC, including Apple, Qualcomm, Advanced Micro Devices, and Nvidia. These companies don’t have the capacity to mass-produce the chips they design, so they outsource this highly complex work (some manufacturing processes involve several hundred precise steps) to TSMC.
This puts TSMC in a great position that even its competitors like Intel come to him to make the chips that go into their products.
As TSMC consistently pushes the boundaries of chip technology and introduces new manufacturing innovations time after time, it has established itself as the best choice in the field. This is evident in the growth of artificial intelligence-related manufacturing efforts. It seems that TSMC management could see the potential that AI offered as early as the second quarter of 2023, when TSMC management predicted that AI revenue would grow at a 50% compound annual growth rate (CAGR) during the next five years and will eventually lead to low growth -the share of teenagers in total income. Management’s forecasts may have underestimated the impact of AI on its revenue. In its recent third-quarter conference call, management noted that AI revenue is expected to triple year over year and should account for a mid-teens percentage of revenue in 2024.
Clearly, TSMC’s growth is far from over.
TSMC is always pushing the boundaries of what is possible with chip manufacturing technology. Its 3 nanometer (nm) chips are among the best available at the moment, and we are already hard at work on 2nm chips. Management said production will ramp up in 2025 and reach full scale in 2026.
Demand for pre-orders is already strong as management said it exceeds demand for the previous two generations (3nm and 5nm chips). That’s because these chips are being designed to be much more efficient than previous generations. When a 2nm chip is configured to produce the same level of computing power as a 3nm chip, it uses 25-30% less power. Given that energy costs are a huge expense for those running a huge data center, the cost savings from the efficiency gains these chips can provide can quickly pay for themselves.
As a result, TSMC is likely to see strong revenue growth in the coming years. This confirms management’s long-term guidance of 15% to 20% in general earnings CAGR over the “next few years,” making it a stock that can easily outperform the market.
Despite strong valuations over the years, TSMC stock still provides a reasonable valuation. TSMC shares trades at 26 times forward earningswhich is not a bad price considering the wider market being measured S&P 500trades at 23.5 times forward earnings.
Investors should feel pretty good about paying a small premium for a company that’s forecast to grow earnings by 15-20% and has significant growth drivers on the horizon.
I already own shares of TSMC, and seeing the billionaire add more shares after the stock has already rallied well in 2024 (up nearly 87% in 2024) encourages me about the future prospects of the company’s stock. Taiwan Semi is there one of my top picks for 2025, and I think now is a great time to buy more.
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Katen Drury ranks in semiconductor manufacturing in Taiwan. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Intel, Nvidia, Qualcomm and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: short calls in february 2025 for $27 on Intel. The Spotted Fool has a disclosure policy.
