Taiwan Semiconductor Manufacturing Company Limited (TSM) shares rose 6% yesterday with Wall Street analysts turning increasingly bullish on the prospects for the chip giant amid Apple, Inc. (AAPL) unveiling a new AI product suite. Apple is the biggest customer of TSMC, accounting for approximately 25% of annual revenue last year. According to Bank of America analyst Brad Lin, Apple’s all-new private cloud computing suite and other on-device generative AI features will result in a notable increase in chip content used in Apple products, boosting the demand for TSMC. According to the analyst, the addressable market opportunity for TSMC will only grow in the next couple of years as Apple continues to unveil new AI products and services that require advanced chips.

What's In The Deal?

Taiwan Semiconductor is Apple’s preferred contract chip manufacturer for custom-designed chips that are found in most Apple devices, including iPhones. TSMC, as one of the largest chip fabrication facility operators in the world, has emerged as a leader in the AI chip space as well. Apple and TSMC have been business partners for over a decade now, and it seems reasonable to assume that TSMC is the exclusive designer of some of the most important chips found in Apple devices. Given this expertise, TSMC is well-positioned to secure future contracts with Apple when the tech giant ramps up spending on integrating AI into its latest devices.

The Bigger Picture

Apple’s AI product suite is likely to trigger a new supercycle in smartphone upgrades, benefiting many of the company’s key component suppliers. According to research firm Canalys, 16% of global smartphone shipments this year will be AI-capable devices, and this number is projected to increase to more than 54% by 2028. Apple’s AI features will only accelerate the adoption of AI-enabled smartphones.

The tech industry is rapidly evolving to support the growth of AI-enabled smartphones. Apple’s foray into AI will benefit semiconductor companies such as TSMC, Nvidia Corporation (NVDA), and Qualcomm Inc. (QCOM) which develop the chips used in Apple devices. In addition, software developers with a focus on AI-supported mobile applications will also enjoy new growth opportunities. Because the deployment of AI mostly happens in cloud environments, leading cloud service providers such as Microsoft Corporation (MSFT) and Amazon.com, Inc. (AMZN) also stand to gain from Apple’s AI strategy.

Dilantha DeSilva has properties in Microsoft. Stocks.News has positions in Microsoft, Amazon, and Apple.