Yahoo Finance Considering Microsoft Corp (MSFT) Ahead Of Earnings Report? Here's A Better Alternative
Microsoft Corp (NASDAQ:MSFT) CEO Satya Nadella has made the Redmond software giant the biggest beneficiary of the AI revolution thanks to his vision and strategy. In 2019, when Microsoft invested $1 billion in OpenAI, the company behind ChatGPT, hardly anyone noticed. But when ChatGPT was launched and the floodgates of generative AI innovation opened, Microsoft was seen as the leader in the AI arms race. Microsoft’s investments in OpenAI have now swelled to $13 billion. The company's long list of AI catalysts includes the revival of Bing Search, AI assistant Co-pilot, and AI PCs, among many others.
Is MSFT Overvalued?
However, some believe the stock has run too much and needs a breather amid Wall Street's growing concerns that just a handful of companies now account for most of the market gains. Morgan Stanley's Lisa Shalett recently said in a note that the Magnificent Seven group of stocks, including MSFT, is poised to see "radical deceleration" in earnings growth, according to a report by Seeking Alpha. Goldman Sachs equity strategist David Kostin calculates that Microsoft's sales growth in the second quarter will come in at 15%, down from 17% in the previous quarter, as per another report by Seeking Alpha. The company is expected to report earnings on July 23. As the company gets too much spotlight and AI expectations from the stock are too high, any decline in growth in the upcoming earnings could cause the stock to fall.
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 upside based on its strong 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 world’s most important and biggest semiconductor companies. Tweaktown reports that the company's long list of customers includes tech giants like Apple, Nvidia, Qualcomm, AMD, and Broadcom, among many others. The AI revolution is expected further to bolster Taiwan Semiconductor's demand and market share. According to Tweaktown's report, the company has a whopping 70% to 80% share of the 5nm semiconductor market and a 90% share of the 3nm chips market. Data from consultancy firm TrendForce shows that Taiwan Semiconductor had a 60% share of the global foundry market as of 2021.
Taiwan Semiconductor's AI Revenue Growth Projections
Taiwan Semiconductor's chips are used in everything from smartphones to electric car sensors and PCs. However, the huge demand for high-end chips unlocked by the generative AI boom has made TSM a promising AI stock. During a first quarter earnings call, Taiwan Semiconductor's management said it expects revenue contribution from AI processors to double this year and account for low-teens percent of total revenue. Revenue from AI is expected to grow at a 50% CAGR over the next five years and account for over 20% of the company's total revenue by 2028.
Taiwan Semiconductor's Moat in the Industry
Taiwan Semiconductor's moat in the AI chips industry is strong and wide. Firstly, the high-end chip manufacturing industry isn't easy to enter, even for major companies. Blackridge Research and Consulting firm reports that establishing a single 3nm fab could cost up to $20 billion. On top of that, Taiwan Semiconductor's real strength lies in churning millions of chips with almost no defects — the company's yield is over 95%, according to the Atlantic Council. Only Samsung is expected to come close to Taiwan Semiconductor's quality and manufacturing capability in the coming years amid its huge investments and plans to foray into the fab industry. Other than Taiwan Semiconductor, it has no formidable competitors.
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Is the China Threat Overblown?
Despite its dominance in the AI chips industry, Taiwan Semiconductor's share price growth has been capped, and its valuation still looks attractive compared to its peers. The stock's forward P/E is 27.7 (47 for Nvidia and 46 for AMD). The biggest concern around TSM is a possible Chinese escalation against Taiwan since the company's major manufacturing operations are based in Taiwan. However, many analysts believe these concerns are overblown and the company has no short-term risks. They say China cannot afford to go into a direct conflict with the US. According to a report by the Hudson Institute, any disruption in Taiwan's semiconductor industry could result in a $1.6 trillion economic loss to the US. Taiwan Semiconductor's chip industry dominance is seen as a ‘Silicon Shield' for Taiwan, which the country can use to deter attacks. Earlier this month, Taiwan Semiconductor's Chairman and CEO C.C. Wei said that it's "impossible" to move chip manufacturing outside of Taiwan and that 80% to 90% of chip manufacturing remains in the country.
Wall Street Thinks AI Boom Will Benefit Taiwan Semiconductor
Wall Street is also growing bullish on the company. Recently, Bernstein analyst Mark Li said that high-end phones and advanced nodes could result in Taiwan Semiconductor topping its 2024 guidance. The analyst thinks the company’s data center revenue is growing as expected. Li increased his price target for TSM to $200 from $150. He expects Taiwan Semiconductor's revenue to increase by 25% and EPS by 28% in 2024. Earlier this month, BofA's Brad Lin also increased his price target for TSM to $180. Lin thinks new AI plans revealed by Apple and other companies at the Computex 2024 event would drive the on-device AI trend, benefiting TSMC, which the analyst called the "key enabler" of AI prosperity.
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This article Considering Microsoft Corp (MSFT) Ahead Of Earnings Report? Here's A Better Alternative originally appeared on Benzinga.com
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
