Chip stocks rally as TSMC predicts strong AI demand for 'many years'

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

After underperforming the broader market earlier this week, the PHLX Semiconductor (^SOX) index was up 1.8% in midday trading Thursday, while the S&P 500 (^GSPC) was up about 0.1%.

AI chipmaker Nvidia ( NVDA ) rose as much as 3%, hitting an all-time intraday high at one point, as investors responded to TSMC's positive sentiment about artificial intelligence. Nvidia rival Advanced Micro Devices ( AMD ) jumped 1.3% ahead of gains. Chipmaker Qualcomm ( QCOM ) rose as much as 1.7%, and semiconductor firm Broadcom ( AVGO ) rose 3.5%. US-listed TSMC shares rose 11%, pushing the company's market capitalization past the $1 trillion mark.

Asked during a call with analysts whether there is an AI bubble, TSMC CEO CC Wei said: “We believe AI demand is real, and it will continue for many years.”

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 profit 54% higher than last year and raised its full-year sales outlook. The proposed directive was largely driven by “very strong AI-related demand,” Wei said. The chip maker expects AI revenue to more than triple in 2024.

TSMC is one of three companies capable of producing AI chips that have been critical to the massive wave of AI innovation since OpenAI's ChatGPT launch in 2022. The Taiwanese company dominates rivals Samsung ( 005930.KS ) and Intel ( INTC ) in AI. Semiconductor market. In addition to 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 investors concerned about the future of the AI ​​space. Wall Street analysts have signaled concern in recent months about the lack of near-term return on investment for big tech companies spending huge sums on AI infrastructure. The concern is that tech companies could ease spending on AI hardware, leading to a slump in shares of companies like Nvidia and its supplier TSMC.

Those fears were on display earlier this week, when the plight of an AI equipment company prompted a rout in chip stocks worldwide. Dutch tech giant ASML ( ASME.DE ) signaled 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. While ASML's results were driven by geopolitical concerns and other factors unrelated to the AI ​​chip market, easily spooked investors sold off shares in Nvidia, AMD and AVGIO, the stocks suffering sharp declines.

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

According to International Business Strategies, a consulting firm that tracks industry data, the market for AI chips will grow 99% in 2024 and 74% the following year. Meanwhile, the semiconductor market as a whole is projected to grow 18% this year and 12% in 2025. IBS data shows that the AI ​​chip market – also known as the accelerator chip market – will overtake this sector in a big way by 2030.

Wall Street analysts reiterated their buy rating on TSM on Thursday.

“[W]Recommend TSMC stock as a key holding for those looking to invest in semiconductors, which we see 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 at X @LauraBratton5.

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