U.S. chip stocks rally as TSMC's AI-backed outlook impresses investors

(Reuters) -U.S. chip stocks rose on Thursday after industry bellwether TSMC's strong sales forecast boosted investor optimism about demand for processors used to power artificial intelligence applications.

Taiwan Semiconductor Manufacturing Co, the world's largest contract chipmaker, raised its expectation for annual revenue growth and said sales from AI chips would account for mid-teen percentage of its full-year revenue.

U.S.-listed TSMC shares rose nearly 9%, lifting the company's market capitalization above $1 trillion.

The forecast from the leading producer of advanced AI chips reinforced investor confidence in the outlook for chipmakers whose market values have skyrocketed in the past two years due to a surge in chip spending by Big Tech.

TSMC customer and AI chip frontrunner Nvidia and smaller rival AMD gained more than 2%. Broadcom, Qualcomm and Micron rose between 1.5% and 3%.

"Nvidia is one of TSMC's major customers, so there is a direct read-across to the American chip firm in the Taiwanese company's results," said Dan Coatsworth, investment analyst at AJ Bell.

Struggling chipmaker Intel's shares also rose 1.3%. Intel has been expanding its chip fabrication facilities in an attempt to challenge TSMC in advanced contract manufacturing - an undertaking analysts expect will take years.

TSMC's outlook also offered some respite to investors after deep forecast cuts from chipmaking equipment giant ASML sparked fears of a slower-than-expected recovery in demand for semiconductors not used in AI.

"Fortunately, everything is fine in AI land," Coatsworth said. "TSMC said demand was strong for both AI-related business and from smartphones, implying that the chip sector still has momentum."

TSMC's U.S.-listed shares have surged more than 80% this year, while Nvidia has more than doubled, as investors pour billions of dollars into chip stocks amid Wall Street's booming picks-and-shovels trade.

(Reporting by Arsheeya Bajwa in Bengaluru; Additional reporting by Akash Sriram; Editing by Maju Samuel)