Is Taiwan Semiconductor Manufacturing Stock a Buy on Strong AI Demand?

With a virtual monopoly on the production of advanced logic chips, Taiwan Semiconductor Manufacturing (NYSE: TSM) is at the heart of the artificial intelligence (AI) infrastructure boom. TSMC, as it is also known, just reported strong Q1 results, although it wasn't enough to give its already strong stock price a lift. However, with the stock trading at a forward P/E of around 24 times this year's earnings, now may be a good time to buy shares.

TSMC is seeing huge demand for AI chips

TSMC continued to benefit from the demand for the AI chips it specializes in producing. Management said, given the demand it was seeing, that its capital expenditure (capex) spending would be at the high end of its prior $52 billion and $56 billion guidance range, with a focus on expanding its 3-nm technology capacity.

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The company spent just over $11 billion in capex in Q1. It noted that this was a rare instance where it was increasing capacity for a node that had hit its capacity target while it was just starting to ramp up its newer 2nm technology.

While TSMC reported a robust 35% year-over-year increase in revenue in the quarter, what may have been even more impressive was that its gross margins continued to expand. Its first-quarter gross margin came in at 66.2%, up 740 basis points from 58.8% a year ago. The company has consistently warned of gross margin pressure from its new U.S. fabs and move to more advanced nodes, yet it has still consistently been pushing its gross margins higher. For Q1, it guided gross margins to be between 65.5% and 67.5%.

This helped lead to a 58% surge in profitability to $3.49 per ADR unit. Its high-performance computing segment, home to AI chips, saw revenue surge 55% sequentially.

Looking ahead, TSMC projected Q2 revenue to come in between $39 billion and $40.2 billion, representing about 32% year-over-year growth at the midpoint. For the full year, it projects revenue growth of more than 30%.

Is TSMC stock a buy?

TSMC said demand for AI chips continues to greatly outpace supply and that it sees no signs of a slowdown anytime soon. It noted that its customers just cannot make enough chips to satisfy demand. This will just continue to drive growth for the company in the years ahead.

That said, I think TSMC's gross margins are still one of the biggest takeaways from the quarter. The company has strong pricing power and is ramping up new node technology quickly, which continues to help lift margins.

TSMC is just one of the best AI infrastructure stories out there, making the stock a buy.

Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.