Riding on AI, TSMC will move towards $185?

According to Zhitong Finance APP, Taiwan Semiconductor (TSM.US) occupies a leading position in the rapidly expanding semiconductor industry. It is leading the development of cutting-edge chips crucial for artificial intelligence (AI) technology.

Taiwan Semiconductor's stock price has risen by nearly 40% this year to $143.60. Despite this, Seeking Alpha contributor Yiannis Zourmpanos believes that Taiwan Semiconductor still has the potential for further upside. Zourmpanos predicts that Taiwan Semiconductor could reach $185 in an optimistic scenario and stabilize around $150 by the end of 2024.

The Fibonacci retracement suggests a key support level at $123. On the downside, $109 is a critical medium-term support level. However, Zourmpanos indicates that given the current price momentum, the likelihood of falling to this level is low.

From the perspective of the Relative Strength Index (RSI), Taiwan Semiconductor's stock price is in a neutral state. Considering recent highs, a double top pattern exists, indicating the possibility of further downside. The lack of bearish divergence at the top of the RSI suggests that due to the absence of historical resistance at the all-time high, the stock price is likely to move higher.

Lastly, the Volume Price Trend (VPT) indicator is very bullish. There are no clear signs of a reversal (downtrend) in the stock price for 2024.

Stable Performance

Taiwan Semiconductor's solid financial performance once again confirms its sustained growth in core business amid various unfavorable factors. The company's revenue in the first quarter of 2024 was $18.87 billion, a 12.9% year-on-year increase. However, compared to the fourth quarter of last year, revenue decreased by 3.8%.

With the AI boom, demand for advanced chips has surged. Taiwan Semiconductor's 3nm chips account for 9% of total wafer revenue, 5nm chips account for 37%, and 7nm chips account for 19%.

Driven by strong revenue growth, Taiwan Semiconductor's earnings per share were $1.38, exceeding most analysts' expectations of $1.30 and surpassing the $1.30 from the same period last year. Net profit also grew significantly by 8.9%, ending three consecutive quarters of decline.

With strong demand for its 3nm and 5nm chips, Taiwan Semiconductor's revenue and profits are expected to continue growing. However, its performance may be affected by seasonal factors in the smartphone business.

Riding the AI Wave

Taiwan Semiconductor executives had warned after the chip industry faced oversupply post-pandemic that deteriorating macroeconomic and geopolitical conditions could impact consumer confidence.

Looking ahead, AI chips have brought huge opportunities for Taiwan Semiconductor. AI chips are expected to be a key driver of growth in 2024, with the company anticipating strong demand for its high-performance computing chips TSMC expects second-quarter sales to be between USD 19.6 billion and USD 20.4 billion, with a growth rate reaching the lower end of the 20% range. The chip giant also forecasts a gross margin between 51% and 53%, with an operating profit margin of 40% to 42%.

In 2023, driven by strong demand from various sectors, the AI chip market reached a record USD 23 billion. The AI market is expected to grow exponentially in the coming years, reaching around USD 151 billion by 2030. This highlights the importance of semiconductor manufacturers like TSMC in maintaining a leading position in development and manufacturing in this AI revolution.

Summary

TSMC has recently shown weak performance, attributed to broader concerns about the semiconductor market. However, the company's performance remains solid.

With the growth of the AI market, TSMC management also holds an optimistic view of the future. The strong trend in demand for AI chips should offset the softness in the personal computer and smartphone markets. Therefore, Zourmpanos believes that the recent pullback has provided a unique buying opportunity for long-term investors