Play TSMC's Best Year Since 1999 With These ETFs

Taiwan Semiconductor Manufacturing Co. TSM, the world’s largest contract chipmaker, saw its shares touch a record high as it prepares to close out its best annual stock performance in 25 years. The stock rose as much as 1.4% in Taipei on Tuesday, briefly surpassing its November 8 peak, before retreating to close flat.

The TSM stock is up 82% this year (as of Dec. 24, 2024). TSMC shares have surged thanks to strong investor enthusiasm for artificial intelligence-related investments.

A Major Beneficiary of the AI Boom

With high-profile clients like Apple Inc., NVIDIA Corp., and Advanced Micro Devices Inc., TSMC has been a significant beneficiary of the AI spending boom. Analysts expect the company to report 36% sales growth for the December quarter, alongside a gross profit margin of 58.3%—its highest since 2022.

The TSMC stock comes from a top-ranked Zacks Semiconductor - Circuit Foundry Industry (top 2%) and top-ranked Zacks Computer and Technology sector (top 6%).

"We continue to observe extremely robust AI-related demand from our customers," CEO C.C. Wei said in a post-earnings webcast. However, revenues from TSMC’s Digital Consumer Electronics sector — which makes chips for devices such as smart TVs and cameras — dropped 19% sequentially in the July-September quarter (read: Buy Taiwan Semiconductor-Heavy ETFs on Upbeat Earnings).

Analyst Endorsement of TSMC for AI Exposure

“For us, TSMC remains the best way to play the AI theme without having to pick a winner or a technology, at a reasonable valuation,” said Kevin Net, head of Asian equities at Financiere de L Echiquier, as quoted on Yahoo Finance.

Zacks Rank #2 (Buy) TSMC currently has an average brokerage recommendation (ABR) of 1.35 on a scale of 1 to 5 (Strong Buy to Strong Sell), calculated based on the actual recommendations (Buy, Hold, Sell etc.) made by 10 brokerage firms. The current ABR compares to an ABR of 1.35 a month ago based on 10 recommendations. You can see the complete list of today’s Zacks #1 Rank stocks here.

Of the 10 recommendations deriving the current ABR, seven are Strong Buy and two are Buy. Strong Buy and Buy respectively account for 70% and 20% of all recommendations. A month ago, Strong Buy made up 70%, while Buy represented 20%.

Based on short-term price targets offered by seven analysts, the average price target for TSMC comes to $226.14. The forecasts range from a low of $200.00 to a high of $250.00. The average price target represents an increase of 9.6% from the closing price of $206.33 recorded on Dec. 24, 2024.

Compelling Valuation

Despite TSMC's strong outlook, the stock doesn't possess a high valuation. On a trailing price-to-earnings (P/E) ratio basis, Taiwan Semiconductor currently trades at a P/E (trailing 12 months) of 33.23X versus 28.09X possessed by the underlying industry.

The price/book (most recent quarter) ratio of the TSMC stock is 8.63X, versus 8.20X recorded by the industry. The price/cash flow (most recent fiscal year) ratio of TSMC is 24.30X versus 23.11X recorded by the industry.

TSMC ETFs in Focus

Apart from the TSMC stock itself, investors can play the stock in the ETF form. The TSMC-heavy ETFs include SP Funds S&P World (ex-US) ETF SPWO (TSMC’s weight 15.75%), SP Funds S&P Global Technology ETF SPTE (TSMC’s weight 15.50%), Matthews Emerging Markets ex China Active ETF MEMX (TSMC’s weight 14.41%) and VanEck Semiconductor ETF SMH (TSMC’s weight 12.65%).

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