1 AI Chip Stock Set to Win from the Cerebras IPO
Earlier this week, CNBC reported that artificial intelligence (AI) chip startup Cerebras Systems is set to make its move into the equity markets through an initial public offering (IPO). This emerging titan isn’t just a flash in the pan—it’s in fierce competition with AI juggernaut Nvidia (NVDA), whose robust graphics processing units (GPUs) are integral for training and running generative AI models like ChatGPT. Cerebras boasts its cutting-edge WSE-3 chip, equipped with enhanced cores and memory compared to Nvidia’s H100 chip, signaling some serious innovation in the AI chip space.
Cerebras is reveling in the AI megatrend, seeing its revenues balloon to $66.6 million in the first half of 2024, a dramatic increase from a mere $8.7 million the previous year. Although the company is still in the red, its net losses have narrowed—circling around $66.6 million over the last two quarters, better than the $77.8 million it lost last year. For context, 2023 saw revenue of $78.7 million and a net loss of $127.2 million, while Q2 of 2024 recorded $69.8 million in sales with a net loss of $50.9 million. Cerebras attributes rising operating expenses to its expanding employee base, which is helping propel this impressive revenue growth.
The AI chip sector is rapidly growing, driven by massive investments from Big Tech players looking to corner the market early on. Public cloud powerhouses like Amazon (AMZN), Microsoft (MSFT), and Google (GOOG)(GOOGL) are also flexing their muscles by developing proprietary AI chips to streamline operations and cut costs—an emerging trend that’s gaining steam.
A noteworthy detail is that UAE-based Group 42 ranked as Cerebras’s largest customer, constituting a staggering 83% of its total sales in 2023. Like many semiconductor firms, Cerebras has chosen to outsource its chip manufacturing to Taiwan Semiconductor Manufacturing (TSM), the world’s biggest chip foundry. This moves us towards another gem in the industry—Taiwan Semiconductor. Let’s delve into how it stands to gain from the ongoing AI boom.
The Bull Case for Taiwan Semiconductor Stock
Taiwan Semiconductor, which currently has a market cap of around $892 billion, is a powerhouse in manufacturing, packaging, testing, and selling integrated circuits (ICs) and other semiconductor devices. The company’s sales demonstrate substantial growth, leaping from $35.7 billion in 2019 to a robust $76.4 billion in the last 12 months. In Q2 of 2024, TSM showcased a 10.3% year-over-year revenue growth, fueled by skyrocketing demand for its 3-nm and 5-nm technologies—although there was a slight drag due to seasonality in the smartphone sector.
TSM’s profitability metrics are impressive, with its gross margin inching up by 10 basis points to 53.2% in Q2, and its operating margin rising by 50 basis points to 42.5%. That makes TSM one of the most profitable tech stocks on the planet. Management projects that AI-related chip sales will grow at a compounded annual growth rate (CAGR) of 50% through 2028, potentially representing nearly 20% of its total sales.
Forecast for TSM Stock
The AI tsunami will not only bolster TSM but also enable revenue growth at an impressive CAGR of 15% to 20% over the next few years. Thanks to its strong revenue trajectory and commitment to operational efficiency, TSM is well-positioned to enhance its earnings and cash flow, allowing for consistent dividend hikes. Currently, TSM offers shareholders an annualized dividend of $2.48 per share, translating to a forward yield of 1.43%. With a substantial share count, TSM’s total annual dividend distribution is roughly $12.5 billion—and it’s worth noting that TSM has increased its dividend payout by over 400% in the last decade, enhancing yield-at-cost significantly.
Analysts are charging ahead with an overwhelmingly positive outlook for TSM, boasting a consensus “strong buy” rating. Out of ten analysts tracking TSM stock, eight recommend a “strong buy,” one suggests a “moderate buy,” and one advocate for a “hold.” The average 12-month target price for TSM stock is positioned at $204.71, translating to about a 19% upside from current levels. Wall Street anticipates TSM’s adjusted earnings will ascend from $5.19 per share in 2023 to $6.57 per share in 2024, with further growth expected to $8.27 per share in 2025. TSM stock is currently trading at 33x trailing earnings, which could put it at an eye-catching price of $275 per share by 2026—an impressive potential upside of over 60% from its present valuation.
Final Thoughts
In conclusion, Cerebras’s impending IPO and its innate rivalry with Nvidia shine a spotlight on the AI chip sector, while Taiwan Semiconductor stands tall as an excellent investment vehicle to capitalize on this growth. If you want to ride the waves of the AI megatrend, keep a close watch on TSM as it sails into promising territory.