Taiwan Semiconductor Manufacturing Stock Pops on Strong Artificial Intelligence (AI) Revenue Growth Guidance. Is TSM Stock a Buy?

Taiwan Semiconductor Manufacturing Co. Ltd. (TSM) stock has surged following the company's strong guidance on artificial intelligence (AI) revenue growth. The stock price has risen by 5.8% to $220.76 at last check Monday, following a 4.78% increase on Thursday. This article will explore the key drivers behind TSM's strong AI revenue growth guidance and discuss whether TSM stock is a buy, sell, or hold.

TSM's AI Revenue Growth Guidance
TSM has projected that its AI revenue will double in 2025, following a tripling in size in 2024. This growth is expected to reach the mid-teens percent of the overall revenue in 2024 and account for over 10% of the overall revenue in 2025. The company's strong demand for advanced technologies like N2, driving capital expenditure projected at $40 billion for 2025, also contributes to its robust AI revenue growth prospects.

Key Drivers Behind TSM's Strong AI Revenue Growth Guidance
TSM's strong AI revenue growth guidance is primarily driven by the continuous strength in leading-edge nodes and AI and HPC segments. The company has raised its long-term revenue CAGR target to approximately 20% for the period 2024–2029, an increase from the previously guided 15–20% for 2021–2026. AI is cited as a major contributor to this growth, with management projecting that AI revenue will double in 2025. Furthermore, TSM provided guidance for a mid-40% CAGR in AI revenue over five years, beginning in 2024.

TSM's AI Revenue Growth Compared to Competitors
TSM's AI revenue growth compares favorably to its competitors, such as Nvidia and AMD. Nvidia, a major competitor in AI chipsets, reported a 46% increase in data center revenue in Q4 2024, driven by AI workloads. AMD, another competitor, has also seen strong growth in its AI-related businesses, with its EPYC server processors and Radeon Instinct GPUs gaining traction in AI applications. However, the specific revenue growth figures for Nvidia and AMD in AI are not provided in the given materials.

Potential Risks and Challenges for TSM's AI Revenue Growth
Based on the provided information, TSM's AI revenue growth is expected to double in 2025 and reach mid-teens percent of the overall revenue in 2024. However, there are potential risks and challenges associated with this growth:

1. Geopolitical Risks: TSM's management expressed confidence in mitigating geopolitical challenges, but there is still a risk of potential U.S. export restrictions to mainland China, which accounts for approximately 10% of the company’s total revenue. This could impact the company's AI revenue growth.
2. Overcapacity for Mature Nodes: The industry faces overcapacity for mature nodes, which could lead to lower demand and pricing pressure for TSM's 7nm node, which is still underutilized. This could impact the company's ability to meet growing customer requirements in both AI and high-performance computing segments.
3. Acceleration of U.S. Capacity Expansion: There is a market concern regarding the potential acceleration of U.S. capacity expansion, which could lead to increased competition and lower pricing for TSM's products. This could impact the company's ability to maintain its market share and pricing power.
4. Dependence on a Few Key Customers: TSM's AI revenue growth is highly concentrated in a few key customers. This dependence on a small number of customers could lead to higher risk if these customers reduce their spending or switch to competitors.
5. Technological Challenges: As AI technology evolves rapidly, there is a risk that TSM's current offerings may become obsolete or less competitive. The company must continue to invest in research and development to stay ahead of the competition and meet the changing needs of its customers.
6. Regulatory Challenges: As AI becomes more prevalent, there may be increased regulatory scrutiny and potential restrictions on the use of AI technology. This could impact TSM's ability to continue to grow its AI revenue.

Is TSM Stock a Buy, Sell, or Hold?
TSM's strong AI revenue growth guidance and robust fundamentals make it an attractive investment opportunity. However, investors should be aware of the potential risks and challenges associated with the company's AI revenue growth. TSM's stock price has already surged following the company's guidance, and investors may want to wait for a pullback before entering a long position. Additionally, investors should monitor the company's progress in mitigating geopolitical risks and maintaining its competitive edge in the rapidly evolving AI landscape.

In conclusion, TSM's strong AI revenue growth guidance makes it an attractive investment opportunity. However, investors should be aware of the potential risks and challenges associated with the company's AI revenue growth and monitor the company's progress in mitigating these risks. TSM's stock price has already surged following the company's guidance, and investors may want to wait for a pullback before entering a long position.