The AI boom is well underway.

So far, much of the conversation has been around chatbots like Alphabet‘s (GOOGL) Bard or OpenAI’s ChatGPT.

But what about the critical hardware that will make the widespread adoption of AI possible?

That’s where today’s Stock of the Week comes in.

It’s a well-known chipmaker that’s growing earnings, revenue and profit margins. In other words, it’s exactly the sort of company I like to see when looking for Stock of the Week candidates.

Add in the fact that it’s set to benefit from the AI boom…

And this is one you won’t want to miss.

Get all the details on the stock – including the ticker – in this week’s video.

Click here or on the image below to watch it.

Transcript

How to Pick Solid Stocks Using CROCI

Hi, Manward family, and welcome to another Stock of the Week. I’m Alpesh Patel, hedge fund manager. And my team, as you know, each week go through a ream of stocks, and they short list them for me. This is a company which I’ve been keeping an eye on. It’s unusual in the sense that it is a rather large company. I try and pick names you may never have heard of. And you might have heard of this one. It’s Taiwan Semiconductor Manufacturing (TSM).

Now, it’s part of my focus on AI – and in particular looking at companies which will benefit from that – but at the same time it’s already showing good growth. Ticks a lot of the boxes for valuation… maybe not necessarily all the boxes for low valuation, but a lot of the boxes for low valuation… good momentum, good income and so on.

Now, this one, as you may well know… Taiwan Semiconductor, it’s huge. They sell their integrated circuits in, obviously, Taiwan, China, Europe, the Middle East, Africa and, of course, the United States as well. It’s actually one of the largest semiconductor companies in the world, and there aren’t many such large semiconductor manufacturing companies. It’s rather a specific skill set that a company needs in order to be able to do this. It’s not as if you can instantly have competition.

They’ve been growing earnings, or profitability, at an average annual rate of 24%. And revenues, or sales, have been growing at an annual rate of 18.3%. That will only increase with the boom in AI. And really, part of my thesis with this one is that we are underestimating the growth rate of AI. Taiwan Semiconductor’s current net profit margins are at 44%, and that’s up from last year’s figure.

Let’s dive a little bit deeper into some of the aspects of this. On my proprietary Alpesh Growth- Value-Income (GVI) rating, it’s got an 8 out of 10. That’s my algorithm which looks at valuation, growth, income, cash flow… and anything with a 7 or higher meets my minimum criteria, which this clearly does.

It’s got a CROCI, or cash return on capital invested, of 14.8%. Now, CROCI is a formula invented by Deutsche Bank and used by Goldman Sachs Wealth Management. And if you want to know why it’s important, there’s links elsewhere around this video.

Momentum is strong. Sortino, a measure of average return versus the risk centered around that, is above 0.3, which is good. Volatility is under 20% – again, good. And it’s got alpha. It’s been outperforming the markets, and I expect it to continue doing that.

Let’s start with valuation, then. Its forecast P/E ratio is only a multiple of 20.3. That’s cheap. That’s a measure of the current share price versus the forecast profitability. The current share price is at a multiple of only 20 times forecast profits, which for a company like this – in semiconductors, where the demand’s going to continue being huge, and as I said, the AI angle – that’s massive. I think the market is underestimating forecast growth. They think turnover may well fall, and they think profits before interest and tax might fall. I think the market has underestimated AI, and I think it has overestimated the downturn from China, and I think it’s underestimated global growth and the rebound in technology.

Turnover in this company has been rising exponentially, going in the right direction. Profit is going in the right direction. Pretax profits and total assets are all going in the right direction. I love all of that. It’s not particularly highly geared. In other words, there isn’t excess borrowing, so that’s good. It’s delivering something of a dividend… so, again, good. And return on capital employed, massive return on equity. In other words, their ability to take the capital they’ve got in the business and convert it into either profits or cash flow is very strong indeed.

For those of you who like looking at charts, it’s got a reverse, or an inverse, head and shoulders pattern, and it’s on a strong upward trend. It’s monthly MACD (moving average convergence/divergence) is flat, now rising. All of those things are rather positive for the company and the direction of share price movements. The one slight negative on a discounted cash flow basis – and don’t read too much into discounted cash flow – as a measure of valuation, it’s arguably overvalued. But there are many measures of valuation, so I’m not too worried about that, as it’s just one measure of valuation.

Overall, I remain very, very positive on this one. And like I said, it’s a big name you might have heard of, but there’s nothing wrong with making money from names you’ve heard of. I hope you enjoyed that. I hope it was informative and entertaining. Thank you very much.