If you've been an investor for a while, you've likely heard the phrase "picks and shovels" when referring to a company. This moniker is given to a business that may not pursue a trend directly. Instead, it's giving its clients the tools they need in their efforts. When it comes to the artificial intelligence (AI) gold rush, there are a few picks-and-shovels companies that are excelling.
While many may point to Nvidia as the ultimate example, Taiwan Semiconductor Manufacturing (TSM -0.25%) supplies the chips that go into Nvidia's graphics processing units (GPUs). This notion that Taiwan Semi is akin to the pickax sellers in the gold rush is good, but it's a known example. As a result, the stock has shot up significantly this year.
However, most investors don't care about past performance and want to know if there's more left in the tank for Taiwan Semi's stock to rise. Let's find out.
The chipmaker behind much of the innovative AI technology
Taiwan Semiconductor (or TSMC, as it's often known) is in a unique position as a chip foundry. Because many companies don't have the infrastructure to build chips, they outsource to TSMC. So a company like Nvidia or Apple designs a chip and then gives that design to TSMC to manufacture for them. This is an excellent position to be in, as Taiwan Semiconductor is a neutral party.
While TSMC makes Nvidia's chips for its GPUs, it also makes chips for AMD. Additionally, with the major cloud computing providers starting to design their own chips as alternatives to GPUs -- like Alphabet's Tensor Processing Unit (TPU) -- Taiwan Semiconductor stands to benefit.
At the end of the day, Taiwan Semiconductor is a winner regardless of the form of computing a client chooses to run their AI workloads on. Management also expects significant growth in this field.
It foresees AI-related revenue increasing at a 50% compound annual growth rate (CAGR) for the next five years. By that time, it estimates AI computing will make up around 20% of its total revenue.That's huge growth, and it also ties into management's overarching projection.
During its investor conference in January 2022, management guided for a 15% to 20% revenue CAGR for the "next several years." Management reiterated that guidance for 2024 and maintained the stance that the level of growth is achievable.
A 15% to 20% CAGR for a company the size of Taiwan Semiconductor is impressive, and it's why investors are so excited about the stock. But there's also one more catalyst that could be even bigger.
Apple's latest announcement could be huge for TSMC
While Taiwan Semiconductor doesn't call out company names in the sales concentration section of its annual report, one client made up 25% of the company's revenue in 2023. Some may think it's Nvidia, but this same client also accounted for about a quarter of TSMC's revenue in 2021 and 2022, a time when Nvidia's GPUs weren't in demand.
There's really only one company this could be: Apple. Because TSMC is a major supplier of chips that go into iPhones, Apple is a massive customer.
Apple also had a massive announcement at its Worldwide Developers Conference last week: Generative AI features will only be available to iPhone 15 phones or newer. This is huge because it's estimated that 90% of the world's iPhones are older than this generation, which could ignite a massive refresh cycle.
Because a quarter of Taiwan Semiconductor's business is from Apple, this is huge news for the company. Apple's stock was up over 10% in the days following the announcement, but TSMC was only up about 2.5%.
This is an oversight by the market and could be a huge opportunity for investors to reap the benefits of increased iPhone demand in an alternative way.
With massive AI demand still coming and a potential upgrade cycle starting for iPhones, there is still plenty of gas left in Taiwan Semiconductor's stock. I think it's one of the best buys on the market right now, and investors will be thanking themselves years down the road for buying it.
