Microsoft Corp (NASDAQ:MSFT) CEO Satya Nadella has made the Redmond software giant the biggest beneficiary of the AI revolution through his vision and strategy. In 2019, when Microsoft invested $1 billion in OpenAI, the company behind ChatGPT, no one noticed. But when ChatGPT launched and the floodgates of generative AI innovation opened, Microsoft was seen as the leader in the AI arms race. Microsoft’s investment in OpenAI has now inflated to $13 billionThe company’s long list of AI enablers includes the rebirth of Bing Search, AI assistant Co-pilot, and AI PCs, among others.
Is MSFT Overvalued?
However, some believe that the stock has run too much and needs a break amid growing concerns on Wall Street that just a handful of companies are now accounting for the bulk of the market’s gains. Morgan Stanley’s Lisa Shalett recently said in a note that the Magnificent Seven group of stocks, including MSFT, is poised for a “dramatic deceleration” in earnings growth, according to a Seeking Alpha report. Goldman Sachs equity strategist David Kostin calculates that Microsoft’s second-quarter sales growth will be 15%, down from 17% in the prior quarter, according to another Seeking Alpha report. The company is scheduled to report earnings on July 23. With the company too much in the spotlight and AI expectations for the stock too high, any decline in earnings growth going forward could send the stock tumbling.
There are always undervalued players in the market for those who know where to look. Let’s discuss an AI underdog that analysts believe has more potential due to its powerful growth catalysts.
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Taiwan Semiconductor: A Better AI Stock Than MSFT?
Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) is one of the largest and most important semiconductor companies in the world. Tweaktown reports that the company’s long list of clients includes tech giants like Apple, Nvidia, Qualcomm, AMD, and Broadcom, among others. The AI revolution is expected to further boost Taiwan Semiconductor’s demand and market share. According to Tweaktown’s report, the company holds a whopping 70-80% share of the 5nm semiconductor market and a 90% share of the 3nm chip market. Data from consultancy TrendForce shows that Taiwan Semiconductor held a 60% share of the global foundry market in 2021.
Taiwan Semiconductor AI Revenue Growth Forecast
Taiwan Semiconductor’s chips are used in everything from smartphones to electric car sensors and PCs. However, the huge demand for high-end chips unleashed by the generative AI boom has made TSM a promising AI stock. In a first-quarter earnings call, Taiwan Semiconductor management said it expects the contribution of AI processors to revenue to double this year and account for about 10% of total revenue. AI revenue is expected to grow at a CAGR of 50% over the next five years and account for more than 20% of the company’s total revenue by 2028.
The Gap Between Taiwan and the Semiconductor Industry
Taiwan Semiconductor has a significant advantage in the AI chip sector. First, the high-end chip manufacturing business is not easy to enter, even for large companies. According to Blackridge Research and Consulting, setting up a single 3nm fab could cost up to $20 billion. Moreover, Taiwan Semiconductor’s real strength lies in its ability to produce millions of chips with near-defects: the company’s yield is over 95%, according to the Atlantic Council. Only Samsung is expected to come close to matching Taiwan Semiconductor’s manufacturing quality and capacity in the coming years, thanks to its huge investments and plans to foray into the fab business. Other than Taiwan Semiconductor, it has no formidable competitors.
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Is the Chinese threat exaggerated?
Despite its dominance in the AI chip sector, Taiwan Semiconductor’s share price growth has been capped and its valuation still looks attractive relative to its peers. The stock’s forward P/E is 27.7 (47 for Nvidia and 46 for AMD). The biggest concern about TSM is a possible Chinese escalation against Taiwan since the company’s main manufacturing operations are based in Taiwan. However, many analysts believe these concerns are overblown and that the company poses no near-term risk. They argue that China cannot afford to come into direct conflict with the US. According to a report by the Hudson Institute, any disruption in Taiwan’s semiconductor industry could result in an economic loss of $1.6 trillion for the US. Taiwan Semiconductor’s dominance in the chip industry is seen as a “silicon shield” for Taiwan, which the country can use to deter attacks. Earlier this month, Taiwan Semiconductor Chairman and CEO CC Wei said it was “impossible” to move chip manufacturing out of Taiwan and that 80% to 90% of chip manufacturing remained in the country.
Wall Street believes AI boom will benefit Taiwan Semiconductor
Wall Street is also growing more bullish on the company. Recently, Bernstein analyst Mark Li said that high-end phones and advanced nodes could help Taiwan Semiconductor beat its 2024 forecast. The analyst believes the company’s data center revenue is growing as expected. Li raised his price target for TSM to $200 from $150. He expects Taiwan Semiconductor’s revenue to grow 25% and EPS to grow 28% in 2024. Earlier this month, BofA’s Brad Lin also raised his price target for TSM to $180. Lin believes that new AI plans revealed by Apple and other companies at Computex 2024 would boost the AI-on-device trend, which would benefit TSMC, which the analyst called a “key enabler” for AI’s prosperity.
There are better high-yield opportunities
The current high-interest rate environment has created an incredible opportunity for income-seeking investors to earn massive yields, but not through dividend stocks… Some private market real estate investments offer retail investors the chance to capitalize on these high-yielding opportunities, and Benzinga has identified Some of the most attractive options to consider.
For example, Alpine Notes from Base Camp offers a 9% APY target with a term of just three months, making it a powerful short-term cash management tool with incredible flexibility. EquityMultiple has issued 61 Alpine Notes series and has met all of its payment and funding obligations without any missed or late interest payments. With a low minimum investment of just $1,000, Basecamp Alpine Notes makes it easier than ever to create a high-yield portfolio.
Don’t miss this opportunity to take advantage of high-yield investments while rates are high. Check out Benzinga’s favorite high-yield deals.
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