Why Microsoft, ASML, and TSMC Stocks All Just Popped

26/05/2023

What happened

AI news drove big tech stock gains in early trading Thursday.

Through 10:05 a.m. ET, shares of Microsoft (NASDAQ: MSFT) are up a respectable 2.2%, while semiconductor manufacturing equipment maker ASML (NASDAQ: ASML) is gaining 4.6%, and Taiwan Semiconductor Manufacturing (NYSE: TSM) is leading the pack higher with a 10.1% gain.

The precise reasons why these stocks are rising may differ — but artificial intelligence (AI) lies at the root of each rally.

So what

Let’s begin with Microsoft. As The Fly reports this morning, Microsoft just announced huge month-over-month growth in customers signing up to use its Azure cloud computing service for OpenAI artificial intelligence functions — from 2,500 customers disclosed on April 25 to 4,500 customers announced at the Microsoft Build 2023 developer conference yesterday, an 80% increase.

That makes OpenAI “the fastest growing service in Azure history,” and promises to help drive growth at Microsoft going forward. Thus, while most analysts polled by S&P Global Market Intelligence have Microsoft pegged for relatively modest 11.5% earnings growth over the next five years, at least one analyst (Oppenheimer) now predicts sales growth alone will reach the mid-teens by 2025 — and with the high profit margins at Azure (43.5%), earnings growth could be faster than that.

Continuing the AI-equals-growth theme, you may have heard that Nvidia just reported earnings and, while sales did decline 13% in Q1, this was less of a drop than analysts expected. What’s more, Nvidia guided investors to expect an immediate turnaround in its business in the second quarter — sales up 64%, driven by surging demand for chips to support AI functions.

Now what

So great news for Nvidia — and as you might expect, Nvidia stock is leaping 25% higher today — but what does it mean for ASML and Taiwan Semiconductor? Why are those two stocks rising today as well?

Well, the thing is — as CNBC points out this morning — Nvidia is selling a lot of AI chips, but Nvidia doesn’t actually make its own chips. Rather, it farms out the manufacturing to Taiwan Semiconductor, which in turn relies upon machines built by ASML to make those chips. Hence, what’s good news for Nvidia is logically good news for TSMC and ASML, as well.

That’s actually pretty great news for investors because, as of this morning, Nvidia stock is selling for a pricey 219 times earnings, versus a more modest (but still pricey 80 times earnings for TSMC, and an (only relatively) cheap 37 times earnings for ASML.

Personally, when I look at nosebleed valuations like these, I can’t help wondering if investors are getting a bit irrationally exuberant about the whole AI phenomenon, and the stocks tied to it. But then again, there’s that 64% growth at Nvidia to consider.

Maybe, just maybe, what we’re actually seeing here is just plain, entirely rational exuberance.

What happened

So what

Now what

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