We recently published a list of 10 Trending AI Stocks to Watch in September. Since Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) ranks 5th on the list, it deserves a deeper look.

Sam Stovall, chief investment strategist at CFRA Research, said while talking to CNBC in a latest program that since 1990, the market on average gains about 18% between the last rate hike and the first rate cut. However, during the 30 days after the first rate cut, the market historically “tread water,” gaining less than “one half of one percent.”

“Most of the action is below surface however, in the sectors, areas where a lot of the leaders be in the defensive areas but I have to add technology in there because investors don’t want to be giving up on the growth,” Stovall said.

Stovall pointed to another important historical data point regarding election years. He said that usually August and September are slow months in the stock market, but during election years the trend shifts to September and October, with markets historically rebounding in November and December once the uncertainty around the election subsides. The analyst recommended investors to position for a post-election rally which he believes buoys growth stocks.

For this article, we chose the top 10 AI stocks currently on investors’ radar following important news, earnings and analyst ratings. With each stock, we have mentioned the number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM)

Number of Hedge Fund Investors: 156

Scientech Corp. Chief Executive Officer Hsu Ming-Chi recently gave an interview to Bloomberg, dismissing concerns regarding huge AI spending on chips and an apparently unattractive return on these investments.

“This booming of the AI industry has just begun. For the most prominent company, the equipment we sold to them probably increased two to three times in a year,” Hsu said.

Scientech makes equipment used in TSMC’s Chip-on-Wafer-on-Substrate technology, which is used to make chips for major companies like Nvidia.

Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) is one of the best AI semiconductor stocks big tech funds are piling into, and for the right reasons. Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) is the biggest foundry that makes chips for fabless companies, enjoying an over 50% market share.  Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) is behind some of the world’s most advanced chips, including 2nm and 3nm nodes. It supplies chips to major players like Apple (AAPL), Qualcomm (QCOM), and Nvidia (NVDA).

Despite these growth catalysts, analysts believe Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) valuation is depressed amid the Taiwan factor — any conflict between China and Taiwan would hamper Taiwan Semiconductor Mfg. Co. Ltd.’s (NYSE:TSM) business due to its huge reliance on international supply chains. The stock is trading at a forward P/E of 27, much lower than peers like ASML, NVDA and AMD. But some believe these concerns are overblown and there are no short-term risks to Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) from this perspective. Bank of America’s Brad Lin recently increased his earnings estimate and price target for the stock, saying TSMC is the “key beneficiary and enabler of AI prosperity.” Lin set a $180 price target on TSMC. Lin thinks Apple’s latest plans revealed at the WWDC event would bode well for Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) since TSMC makes 25% of its revenue from the Cupertino giant.

Baron Technology Fund stated the following regarding Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) in its Q2 2024 investor letter:

“Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM), the world’s leading semiconductor foundry, contributed to performance in the second quarter, driven by continued strong data center AI accelerator demand, optimism on a potential edge AI replacement cycle for smartphones and PCs, and expectations for price hikes next year (“selling our value,” in the words of C.C. Wei, TSMC’s CEO). In contrast with the sluggish broader semiconductor foundry market, TSMC is enjoying a record[1]breaking year, with management guiding for revenue to grow in the low to mid-20% range year-over-year in 2024, thanks to the company’s near[1]monopoly in manufacturing the world’s most advanced chips. According to C.C. Wei, “almost all the AI innovators are working with TSMC to address the insatiable AI-related demand for energy-efficient computing.” This strong AI demand, coupled with TSMC’s unrivaled competitive position, is driving “a high level of customer interest and engagement at N2” (TSMC new process node which will start production in 2H25), with N2 revenue expected to “certainly be larger” and with a “better margin profile” than N3 (TSMC’s most advanced node today). We believe TSMC will sustain strong double-digit earnings growth for years to come, driven by rapidly growing demand for advanced chips and continued market share gains enabled by its superior technology, reliability, and customer service.”

Overall, Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) ranks 5th on Insider Monkey’s list titled 10 Trending AI Stocks to Watch in September. While we acknowledge the potential of Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM), our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than TSM but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article is originally published at Insider Monkey.