Apple’s new artificial intelligence (AI) features could propel this semiconductor company to a $1 trillion valuation

Apple (NASDAQ: AAPL) unveiled its new artificial intelligence features called “Apple Intelligence” a few weeks ago at its Worldwide Developers Conference. Highlights include text generation and summarization in apps, advanced AI-assisted photo editing capabilities, and a much smarter and more powerful Siri. It also integrates third-party services like ChatGPT for more advanced prompts.

What makes Apple Intelligence so appealing is the amount of AI processing it does on-device. Instead of taking your query, sending it along with all the relevant data to a server, waiting for the server to process your request, and then downloading the results to your device, the entire process happens on your iPhone, Mac, or iPad. For more advanced queries that require a larger base model, Apple uses its own servers and a system called Private Cloud Compute, which protects user privacy.

Both developments could be a major win for one of Apple’s largest suppliers. Because all of these new features run on Apple-designed silicon, the chip foundry Taiwan Semiconductor Manufacturing Co. (NYSE:TSM) could see an increase in orders thanks to Apple Intelligence. Furthermore, since Apple is leading the way in on-device AI processing, it could encourage other device makers to also buy more advanced chips from TSMC.

A few silicon wafers with printed circuits on them.A few silicon wafers with printed circuits on them.

Image source: Getty Images.

Pushing Artificial Intelligence to the Edge

With Apple Intelligence, Apple is ushering in the next phase of artificial intelligence, known as edge AI (where data and algorithms are processed directly on the end device, in this case a smartphone, tablet or PC).

In order to process AI queries on-device, however, the devices need to be capable. That means that hardware that’s even a few years old may not be able to process AI requests as well as newer devices, if it can process them at all. For example, Apple is limiting Apple Intelligence features to the iPhone 15 Pro, iPhone 15 Pro Max, and the upcoming iPhone 16 devices. (Note: the limiting factor here is the amount of short-term memory, or RAM, on the device, not the processors themselves.)

As a result, Apple could see strong demand from users looking to upgrade their phones in the coming years as Apple Intelligence features roll out around the world. And more iPhone sales means more demand for TSMC’s chips.

But TSMC doesn’t just supply chips for Apple. It produces the most chips in the world, accounting for more than 60% of the market. That scale gives it a huge competitive advantage over smaller foundries, because it can invest more money in R&D to develop more advanced processes to print more powerful, energy-efficient chips. That helps it retain existing customers like Apple who are looking for cutting-edge chips, and attract more of their customers. It also helps TSMC attract new customers, as innovations like edge AI push companies to adopt new chip designs.

The Apple Cloud is Just Getting Started

To support third-party large language models (LLMs) and its own more advanced LLM, Apple created Private Cloud Compute (PCC). The system uses Apple servers that also implement the tech giant’s own chip designs.

It’s worth noting that Apple isn’t using the platform to train AI models. It’s using PCC to process data and algorithms that require more processing power than what’s available on consumer devices. The initial implementation sends prompts to ChatGPT.

There’s a lot of potential for Apple to expand its data center capacity as it partners with more companies and developers who want to integrate their AI services with Apple’s platform. When the company announced its partnership with OpenAI’s ChatGPT, it said it was working to bring more partners onto the platform later this year. If Apple can encourage developers to use PCC, it could further increase Apple’s demand for TSMC’s services. It also gives Apple another way to generate revenue from developers.

Apple has a long way to go to grow AI capabilities through third-party integrations. Just think of the phenomenal growth of the App Store over the past 15 years. Similar growth would be a boon for both Apple and TSMC.

Creating a $1 Trillion Semiconductor Company

TSMC already has a market cap of around $900 billion. Yet shares appear undervalued at current prices given the growth potential fueled by continued demand for AI chips.

The stock trades for about 27x forward earnings, which is a more than fair price to pay. It should be able to grow its earnings fast enough to justify that price, as demand for more advanced chips supports its revenue growth and improves its operating margins. Analysts expect earnings to rise by more than 25% next year.

A strong iPhone upgrade cycle in the coming years, increasing demand from Apple’s new data centers, and the general push toward edge computing all bode well for TSMC’s continued growth. Its competitive advantage in creating the most advanced, powerful, and energy-efficient chips will serve the company well in the coming years. It’s only a matter of time before the company reaches a $1 trillion market cap.

Should You Invest $1,000 in Taiwan Semiconductor Manufacturing Now?

Before you buy Taiwan Semiconductor Manufacturing stock, you should consider the following:

The Motley Fool Stock Advisor team of analysts has just identified what they think is the 10 best stocks for investors to buy now… and Taiwan Semiconductor Manufacturing wasn’t one of them. The 10 stocks that made the cut could deliver monster returns in the years to come.

Think about when Nvidia made this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $751,670!*

Stock Advisor offers investors an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks each month. The Stock Advisor has service more than quadrupled the return of the S&P 500 since 2002*.

View the 10 stocks »

*Stock Advisor returns as of July 2, 2024

Adam Levy has positions in Apple and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Apple and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.

Apple’s New Artificial Intelligence (AI) Features Could Help This Semiconductor Company Hit $1 Trillion Valuation was originally published by The Motley Fool

Leave a Comment