As an investor, keeping an eye on the investing habits of billionaire hedge fund managers can serve two purposes. First, it can spark new investment ideas by bringing attention to companies you may not have thought about. Second, it can help validate already-made investment decisions.
Chase Coleman and his team at Tiger Global Management recently increased the hedge fund’s stake in a popular way to invest in the artificial intelligence (AI) arms race: Taiwan Semiconductor Manufacturing (NYSE: TSM), commonly referred to as TSMC.
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In the third quarter, Tiger Global Management increased its stake in the business by nearly 20% and it now owns 3.63 million shares (2.8% of its overall portfolio) valued at $671 million. The fact that the hedge fund is still buying suggests there might still be time for others to buy what is considered an expensive stock by some financial metrics.
It’s the fourth quarter now, so the question is whether there is still time to buy TSMC. Let’s take a closer look and see if an answer presents itself.
TSMC is the world’s largest semiconductor chip manufacturer, serving as a fabricator for several of the biggest tech companies and chip designers in the world. Almost every company in the high-tech space uses TSMC-manufactured chips, including Apple, Qualcomm, Advanced Micro Devices, and Nvidia. These companies don’t maintain the facilities to produce the chips they design on a large-scale basis, so they outsource that very complicated work (some manufacturing processes involve several hundred precision steps to complete) to TSMC.
This puts TSMC in a great position, as even competitors like Intel come to it to manufacture the chips that go into their products.
Because TSMC consistently pushes the limits of chip technology and introduces new manufacturing innovations time after time, it has affirmed itself as a top choice in the space. This can be seen in the growth of its AI-related production efforts. It seems TSMC management could see the potential that AI offered all the way back in Q2 2023 when TSMC’s management forecasted AI-related revenue would grow at a 50% compound annual growth rate (CAGR) for the next five years and eventually account for a low-teens percentage of overall revenue. Management’s predictions may have understated the impact of AI on its revenue. In its recently held third-quarter conference call, management noted that AI-related revenue is expected to triple for the year and should make up a mid-teens percentage of revenue in 2024.
Clearly, TSMC’s growth is far from over.
TSMC is always pushing the limits of what’s possible with chip-manufacturing technology. Its 3-nanometer (nm) chips are among the best available right now, and it’s already hard at work getting its 2nm chips to production. Management said production will ramp up in 2025 and reach full scale in 2026.
Preorder demand is already strong, as management stated it exceeded the demand for the previous two generations (3nm and 5nm chips). This is because these chips are being developed to be far more efficient than previous generations. When a 2nm chip is configured to produce the same computing power level as a 3nm chip, it uses 25% to 30% less energy. Considering that energy costs are a massive input for anyone operating a massive data center, the cost savings of an efficiency upgrade that these chips could provide may pay for themselves quickly.
As a result, TSMC will likely see strong revenue growth in the years to come. This backs up management’s long-term guidance of 15% to 20% overall revenue CAGR over the “next few years,” making it a stock that could easily beat the market.
Despite the estimates of strong growth over multiple years, TSMC stock still provides a reasonable valuation. TSMC stock trades at 26 times forward earnings, which isn’t a bad price to pay considering that the broader market, measured by the S&P 500, trades at 23.5 times forward earnings.
Investors should feel pretty good about paying that slight premium for a company that’s projected to grow revenue at a 15% to 20% pace and has significant growth drivers on the horizon.
I already own TSMC stock, and seeing a billionaire add more shares after the stock has already had a good run in 2024 (up nearly 87% so far in 2024) encourages me about the company’s future stock performance prospects. Taiwan Semi is one of my top stocks for 2025, and I think now represents a great time to purchase more.
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Keithen Drury has positions in Taiwan Semiconductor Manufacturing. 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 February 2025 $27 calls on Intel. The Motley Fool has a disclosure policy.
