From the Wall Street Journal via MSN, May 11:
Big tech companies are tripping over themselves to get as many chips as possible to secure AI supremacy. So much so that the world’s ability to make what they want is coming under growing strain.
Microsoft, Meta Platforms, Alphabet and Amazon.com collectively plan capital spending of $725 billion this year, much of it on artificial-intelligence chips. That bodes well for the makers of those chips, particularly the largest contract manufacturer, Taiwan Semiconductor Manufacturing Co.
The spotlight for chip investors has largely been elsewhere lately. Markets have recently blessed memory-chip manufacturers whose sales and prices have skyrocketed. Intel and Advanced Micro Devices are also celebrating a shift within AI toward using autonomous agents where their central processors are increasingly important.
There is an argument, though, that nobody in the chip world is better positioned to reap the rewards of this new phase than TSMC. And despite all that, its stock doesn’t look expensive.
While the company doesn’t make memory chips, it is the go-to manufacturer for just about everything else—including Nvidia’s market-leading AI chips and Apple’s smartphone chips. It has already seen sales and profits soar over the past few years.
The strength of TSMC’s position is evident in the recent expansion of its gross margins. Those margins get fatter when sales grow faster than expenses, something that happens for TSMC when its factories are running closer to full blast.
High capacity utilization offsets the large fixed costs of maintaining chip factories. With demand soaring, the company’s gross margins climbed to around 66% in the first quarter, from roughly 59% a year before.
TSMC Chief Financial Officer Wendell Huang told analysts last month that those margins will actually compress in the latter part of the year—but for good reason. The company is moving to high-volume production of its newest generation of cutting-edge chips, which it calls N2. Costs naturally go up during such ramp-up phases, then come down when production stabilizes....
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