Chip stocks rally as TSMC forecasts strong AI demand for “many years.”

Optimism about AI demand in Taiwan Semiconductor Manufacturing Company's (TSM) stunning third-quarter earnings boosted chip stocks on Thursday.

TSMC reported quarterly profit of 325.3 billion new Taiwan dollars ($10.1 billion), up 54% from a year earlier, beating Wall Street forecasts. The company also raised its full-year sales forecast: Sales rose 29% in 2024 compared to the previous year, increasing the previous forecast of the mid-20s.

The company also reported the following:

• Adjusted earnings per share of 12.54 New Taiwan dollars ($0.39) versus NT$11.55 ($0.36) expected and NT$8.13 ($0.25) in the third quarter of 2023

• Sales of 759.7 billion New Taiwan dollars (US$23.5 billion) versus expected NT$751.1 billion (US$23.3 billion) and NT$546.7 billion (US$17 billion) in the third quarter of 2023

The positive outlook was largely driven by “extremely strong AI-related demand,” which TSMC CEO CC Wei cited. The chipmaker expects AI sales to more than triple in 2024.

U.S.-listed TSMC shares rose 13% on the news, pushing the company's market capitalization past $1 trillion and sending chip stocks higher across the board. Nvidia (NVDA) rose 2.6% on Thursday, while Advanced Micro Devices (AMD) rose 1.3% before erasing gains. Qualcomm (QCOM) gained 1.3% and Broadcom (AVGO) gained 2.9%.

After underperforming the S&P 500 (^GSPC) earlier this week, the PHLX Semiconductor (^SOX) index gained 2% on Thursday, outpacing the S&P 500's 0.13% gain.

TSMC is one of three companies capable of producing AI chips, which have been crucial to the massive wave of AI innovation following the launch of OpenAI's ChatGPT in 2022. The Taiwanese company dominates competitors Samsung (005930.KS) and Intel (INTC) in the AI ​​semiconductor market. TSMC makes the artificial intelligence chips developed by AI superpower Nvidia and its rival Advanced Micro Devices. These chips are used in data centers to power AI software like ChatGPT and other popular bots. Other major TSMC customers include Apple (AAPL), Qualcomm and Broadcom.

TSMC's positive third-quarter results and full-year outlook are a welcome sign for anxious investors worried about the future of the AI ​​space. Wall Street analysts have expressed concerns in recent months that Big Tech firms investing large sums in AI infrastructure will not see a near-term return on investment. The concern is that tech companies could cut spending on AI hardware, causing shares of companies like Nvidia and its supplier TSMC to fall.

Those fears were highlighted earlier this week when an AI equipment company's problems caused global chip stocks to plummet. Dutch tech giant ASML (ASME.DE) said in its third-quarter earnings release this week that sales of its machines – used by TSMC to make Nvidia's leading AI chips – were slowing. Although ASML's results were driven by geopolitical concerns and other factors unrelated to the AI ​​chip market, slightly spooked investors sold shares of Nvidia, AMD and AVGO, causing sharp losses.

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

However, analysts put TSMC executives to the test in a call Thursday, asking company leaders whether there is an AI bubble.

“We believe the demand for AI is real,” Wei replied, “and it will continue for many years to come.”

“Almost every AI innovator works with TSMC, so we probably get the deepest, most comprehensive insight of anyone in this industry,” he continued.

According to consulting firm International Business Strategies, which tracks industry data, the market for AI chips will grow 99% in 2024 and another 74% next year. Meanwhile, the overall semiconductor market is expected 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 surpass the entire sector by 2030.

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

“(We) recommend TSMC stock as a core holding for investors looking to invest in semiconductors, which we view as the foundation of the expanding digital economy,” Needham analyst Charles Shi wrote in a note to investors on Thursday.

Laura Bratton is a reporter for Yahoo Finance. Follow her on X @LauraBratton5.

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