Friday, October 18, 2024

Chip stocks rally as TSMC forecasts strong AI demand for ‘many years’

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Several chipmaker stocks rallied on Thursday amid optimism over AI demand in Taiwan Semiconductor Manufacturing Company’s (TSM) blowout third quarter earnings.

AI chipmaker Nvidia (NVDA) rose as much as 3%, at one point touching an all-time intraday high, as investors responded to TSMC’s positive sentiment about artificial intelligence. Nvidia’s rival Advanced Micro Devices (AMD) climbed 1.3% before paring gains. Semiconductor firm Broadcom (AVGO) ended the day up 2.7%. Chipmaker Qualcomm (QCOM) rose up to 1.7%, though the stock later reversed direction. US-listed TSMC shares jumped 9.8%, pushing the company’s market capitalization past the $1 trillion mark.

After underperforming the broader market earlier this week, the PHLX Semiconductor (^SOX) Index gained nearly 1% Thursday, while the S&P 500 (^GSPC) closed flat.

TSMC manufactures artificial intelligence chips designed by Nvidia and its rival Advanced Micro Devices, and those chips are used in data centers to power AI software such as ChatGPT and other popular bots. TSMC on Thursday reported third-quarter profits 54% higher than last year and lifted its full year sales outlook. The raised guidance was largely driven by “extremely robust AI-related demand,” Wei said. The chip manufacturer expects AI revenue to more than triple in 2024.

TSMC is one of three companies capable of manufacturing AI chips that have been crucial to the massive wave of AI innovation following the launch of OpenAI’s ChatGPT in 2022. The Taiwanese company dominates rivals Samsung (005930.KS) and Intel (INTC) in the AI semiconductor market. Aside from Nvidia and AMD, major TSMC customers include Apple (AAPL), Qualcomm, and Broadcom.

TSMC’s sunny third quarter earnings report and executives’ commentary on artificial intelligence are welcome signs for angsty investors worried over the future of the AI space. Wall Street analysts have signaled concerns in recent months over the lack of a near-term return on investment for Big Tech firms spending massive sums on AI infrastructure. The worry is that tech companies could ease spending on AI hardware, causing a downturn in shares of companies like Nvidia and its supplier TSMC.

REUTERS/Ann Wang/File Photo

The optimism over AI demand in Taiwan Semiconductor Manufacturing Company’s blowout third quarter earnings boosted chip stocks. (REUTERS/Ann Wang/File Photo) (Reuters / Reuters)

Those fears were on display earlier this week, when an AI equipment company’s woes prompted a rout in global chip stocks. Dutch tech giant ASML (ASME.DE) indicated in its third quarter earnings release this week that sales of its machines — which are used by TSMC to make Nvidia’s leading AI chips — would ease. Though ASML’s results were driven by geopolitical concerns and other factors unrelated to the AI chip market, easily-spooked investors sold off shares of Nvidia, AMD, and AVGO, with the stocks suffering sharp declines.

TSMC’s results Thursday helped those AI chip stocks partially recover from those losses.

The AI chip market is set to grow 99% in 2024 and another 74% next year, according to consulting firm International Business Strategies, which tracks industry data. Meanwhile, the semiconductor market overall is projected to grow 18% this year and 12% in 2025. IBS data shows the AI chip market — also known as the accelerator chip market — outpacing the sector at large through 2030.

Wall Street analysts on Thursday reiterated their Buy ratings on TSM.

“[W]e recommend TSMC stock as a core holding for investors who look to invest in semiconductors, which we view as the foundation of the expanding digital economy,” Needham analyst Charles Shi wrote in a note to investors.

Laura Bratton is a reporter for Yahoo Finance. Follow her on X @LauraBratton5.

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