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Jensen Huang is the co-founder and CEO of Nvidia, the AI chip master that in July became the world’s first company to hit a $4trn market-cap. The stock has since pushed on, with Nvidia now valued at $4.34trn, as I write.
Note that the ‘0.34’ bit at the end of that figure is actually $340bn! That’s more than the market-cap of AstraZeneca ($253bn), the largest listed firm in the FTSE 100.
Safe to say then, Nvidia’s CEO knows a thing or two about building value.
TSMC
On Friday 22 August, Huang was in Taiwan. He was asked by a reporter what he thought about the US government taking stakes in chip companies, including potentially Taiwan Semiconductor Manufacturing (NYSE:TSM), known as TSMC.
“Well, first of all, I think TSMC is one of the greatest companies in the history of humanity, and anybody who wants to buy TSMC stock is a very smart person,” he replied.
The first part of that sentence is undeniably true. TSMC is the world’s leading semiconductor foundry, making the cutting-edge chips that power everything from iPhones to artificial intelligence (AI) data centres.
Its scale and advanced manufacturing give it a strategic importance to the global economy that few other companies can rival. Blue-chip customers include Apple, Broadcom, AMD and, of course, Nvidia.
These firms outsource chip manufacturing to TSMC rather than spend a fortune doing it themselves. Indeed, the main reason for Huang’s trip to Taiwan was in relation to TSMC’s work on the company’s next-generation AI chip architecture (called Rubin).
Taking stock
But what about the second part of Huang’s statement? Could it be a smart stock worth considering today? I think so, though there are a couple of things worth watching.
One is that TSMC is building ‘fabs’ (a specialised factory where semiconductors are made) abroad, with a whopping $165bn committed to investments in the US. While this diversifies its global footprint and pleases the US government, it will probably weigh on profit margins, at least for a time.
Also, if the US government does one day become a TSMC shareholder (in exchange for Biden-era CHIPS Act grants), this could inflame China-Taiwan tensions.
But I think the positives far outweigh the negatives here. For starters, TSMC is at the heart of the ongoing tech/AI revolution, which is only likely to deepen over the next decade. It is the ultimate picks-and-shovels tech play, in my opinion.
And with an advanced fab costing roughly $10bn to $20bn, the barriers to entry in its industry are absolutely enormous.
Warren Buffett once said: “If you gave me $100bn and said take away the soft‑drink leadership of Coca‑Cola in the world, I’d give it back to you and say it can’t be done.” I reckon this applies even more so to TSMC, especially with its cutting-edge 2nm chips due to be launched later this year.
In Q2, AI-related demand helped revenue jump 44% to $30bn. But chief executive CC Wei said AI demand is likely to remain very strong: “Increasing AI model usage and adoption…means more and more computation is needed, leading to more leading-edge silicon demand [benefitting TSMC].”
The stock is currently trading at 24 times forward earnings, about the same as the S&P 500. At this price, I think TSMC is indeed a smart stock to consider.
