We recently published a list of 8 Most Profitable Tech Stocks Right Now. In this article, we are going to take a look at where Taiwan Semiconductor Manufacturing Company (NYSE:TSM) stands against other most profitable tech stocks right now.
Technology Sector’s ‘High Bar’
In an interview with CNBC on October 10, Drew Pettit, Director of US Equity Strategy at Citi Research, shared his thoughts about the upcoming earnings season and its potential impact on the market. With the Dow and S&P 500 reaching new closing highs, Pettit raised the question of whether earnings would justify the current valuations. The technology sector has been on a tear, with many software names running up significantly in recent weeks. However, Pettit’s warning suggests that investors should be cautious about getting too caught up in the hype. He noted that when there’s a high bar, investors should be prepared for potential disappointments.
Pettit sounded a note of caution when it came to the tech sector, particularly software stocks. He noted that software has the highest bar within tech, not just in terms of growth expectations but also in terms of monetization. Many software companies are not seeing the expected growth in the next three years, which is already priced into their valuations. This mismatch between expectations and reality could create volatility in the sector.
In terms of specific guidance, Pettit expects companies to use the current uncertainty as an excuse to walk down expectations for Q4. This is a typical trend in US markets, where companies tend to set low expectations and then beat them. Pettit advises investors to focus on companies that can deliver on their promises.
Overall, Pettit’s comments suggest that investors should be cautious about the tech sector, particularly software stocks, and focus on companies that can deliver on their promises. He also emphasizes the importance of looking beyond the current quarter and focusing on long-term growth prospects.
Tech Sector Will Thrive Despite Short-term Challenges
Dan Flax, Senior Research Analyst at Neuberger Berman is bullish on the technology sector, with a focus on companies that are well-positioned to capitalize on the next generation of workloads and are executing well on their product cycles. Flax expects concerns about cyclical headwinds to remain a factor but also sees select opportunities in the sector. He also noted that enterprise customers are looking to adjust to changes in the landscape cyclically and invest in transforming their organizations, which will drive technology spending in the second half of the decade.
As investors navigate the current market landscape, it is essential to approach the tech sector with a sense of caution. While the sector has been experiencing a significant upswing, investors should focus on companies that have a proven track record of delivering on their promises, rather than getting caught up in the hype surrounding certain stocks.
Our Methodology
To compile our list of the 8 most profitable tech stocks right now, we used the Finviz and Yahoo stock screeners to compile an initial list of the 40 largest technology companies by market cap. From that list, we narrowed our choices to companies with positive TTM net income and 5-year net income growth informed by reputable sources, including SeekingAlpha, which provided insights into 5-year growth rates, and Macrotrends, which supplied information on trailing twelve-month (TTM) net income. Then we sorted the stocks in ascending order, according to their hedge fund sentiment, which was taken from our database of 912 elite hedge funds, as of Q2 of 2024.
Why do we care about what hedge funds do? 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).
A close-up of a complex network of integrated circuits used in logic semiconductors.
Taiwan Semiconductor Manufacturing Company (NYSE:TSM)
Number of Hedge Fund Holders: 156
TTM Net Income: $29.90 Billion
5-Year Net Income CAGR: 22.90%
Taiwan Semiconductor Manufacturing Company (NYSE:TSM) is the world’s largest independent semiconductor company which plays a critical role in the global tech supply chain by powering everything from smartphones to data centers. The company produces chips for many leading global companies, including Apple, AMD, and NVIDIA. Its cutting-edge technology, especially in advanced process nodes has solidified its role in high-performance computing and AI applications
Taiwan Semiconductor Manufacturing Company (NYSE:TSM) has a market share of almost 30%. The company’s advanced 2nm, 3nm, 5nm, and 7nm technologies have enabled it to maintain its position as a top player in the industry. The company’s latest developments in 2nm and A16 process technologies are expected to further solidify its market leadership.
Its A16 manufacturing process, announced in April 2024, is best suited for high-performance computing with a complex signal route and dense power delivery network, with mass production scheduled for the second half of 2026. These advancements in 1.6nm and 2nm process technologies will provide a significant boost to the company’s growth, particularly in the AI and large machine learning tasks segment.
Taiwan Semiconductor Manufacturing Company’s (NYSE:TSM) 2nm (N2) process technology which offers a 10% to 15% speed improvement at the same power, or 25% to 30% power improvement at the same speed, and more than 15% chip density increase compared to 3 nm chips are expected to surpass both 3nm and 5nm sales in their respective initial two-year periods, with volume production on track for 2025.
Additionally, the company’s capacity utilization is expected to rise in the second half of FY24, driven by growing demands for sub-7nm process technologies. This improvement in utilization will benefit the company’s near-term growth and expand its gross margins.
Taiwan Semiconductor Manufacturing Company’s (NYSE:TSM) advancements in 1.6nm and 2nm process technologies give it a competitive edge. The company’s market leadership in the most advanced process technology below 7nm is expected to continue, analysts forecast the company to grow its earnings by 23.61% this year.
Overall, TSM ranks 4th on our list of most profitable tech stocks right now. While we acknowledge the potential of TSM to grow, 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.
READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.
Disclosure: None. This article is originally published at Insider Monkey.