Taiwan Semiconductor, IBD stock of the day, cashes in on AI chip production

Taiwan semiconductor manufacturing (TSM) is the IBD Stock Of The Day, as the world’s leading contract chip maker benefits from customers ordering AI chips. TSM shares rallied on Wednesday.

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The company, better known as TSMC, reported better-than-expected second-quarter results on Monday when it announced monthly sales for June.

TSMC generated second-quarter revenue 1% above analyst estimates, Wedbush Securities analyst Matt Bryson said in a note to clients. Sales for the June quarter were the equivalent of $15.65 billion, compared to $17.89 billion in the same period last year. TSMC reports monthly sales in Taiwan dollars.

AI chips have been a bright spot for TSMC. They come in the low sales of processors for personal computers, traditional servers and smartphones. TSMC makes AI chips for fabulous semiconductor companies including AMD (AMD), broadcom (AVGO) and Nvidia (NVDA).

TSM shares could form a flat basis

In today’s afternoon stock market trading, TSM stock was up 2.6% to 103.88.

TSM stock is bouncing on a pullback at its 21-day EMA and 10-week line, according to IBD analysis.

Taiwan Semiconductor is also on track to form a flat base with a buy point of 110.69 in the next week or so.

On May 25, TSM stock broke out of a 14-week consolidation pattern, according to IBD MarketSmith charts.

TSMC earnings due next week

While TSMC’s second-quarter sales report was positive, a more significant recovery for semiconductor sales appears to have moved from this year to 2024, Bryson said.

“While we believe our 2023 numbers are still achievable, TSMC’s sales linearity appears to be more loaded into the backend than we previously anticipated,” he said. Bryson rates TSM stock as an outperformer.

Bryson said he remains positive on TSM stock, given the company’s role in manufacturing nearly every available AI chip. In addition, Taiwan Semiconductor benefits from manufacturing chips for Apples (AAPL) iPhones. He called it “one of the few consumer products that holds up in 2023.”

TSMC expects to report its second quarter results on July 20.

TSM stock called the “Long Idea” favorite

Wall Street remains more curious about TSMC’s prospects than its results, Mizuho Securities analyst Jordan Klein said in a note to clients. Many analysts expect TSMC to lead below estimates for the third quarter, he said.

However, Klein said he was optimistic about TSM stock going forward next year. He sees an expected reacceleration in revenue growth, aided by robust demand for AI chips. The company should also benefit from a recovery in smartphone sales. There will also be higher prices from a mix shift to 3-nanometer chips, he said.

“I rank TSM as one of my favorite semi-long ideas that remains underowned (and) very cheap relative to an expected growth rebound next year,” Klein said.

Additionally, TSM shares are on the IBD Tech Leaders list.

Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.

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