Taiwan Semiconductor Manufacturing Company (TSM), or TSMC, has been benefiting all year long thanks to favorable demand for Nvidia’s (NVDA) products. Shares are up nearly 77% year-to-date, and this discounted high flyer still has a lot of room to run.
Taiwan Semiconductor is a semiconductor contract manufacturing and design company and one of the largest players in the global foundry market. Companies like Nvidia, Advanced Micro Devices (AMD), and Apple (AAPL) outsource their chip manufacturing to Taiwan Semiconductor.
I am bullish on TSMC stock despite the large run-up due to its wide moat, future growth prospects, and its current valuation.
Taiwan Semiconductor Is the Best in the Business
Taiwan Semiconductor has an enormous moat, so I am primarily bullish on the stock. It’s the best in the business, and don’t take it from me; take it from legendary value investor Warren Buffett, who coined the term “economic moat.” During Berkshire’s 2023 annual meeting, Buffett said, and I quote, “Taiwan Semiconductor is one of the best-managed and important companies in the world… and there’s nobody in the chip industry that’s in their league.”
Consequently, this wide moat has allowed TSMC to gain market share dramatically over the past decade. Its revenue has compounded 14.3% over the past 10 years, on a TTM basis, from $24 billion to $70.5 billion. According to Counterpoint Research, TSMC commands a market share of 62% of the global foundry market as of Q2 2024. With use cases of generative AI, I don’t see TSMC getting irrelevant soon.
Moreover, if TSMC sustains this market share over the next decade, its top line could expand remarkably. Credence Research estimated the global foundry market to be worth $124.3 billion in 2023 and expects it to reach $172.4 billion by 2032. If TSMC’s market share holds steady at 60%, as it has over the past seven quarters, its revenue by 2032 could exceed $100 billion.
TSM has a Plethora of Future Prospects
I like examining companies based on several criteria, one of which is whether or not they have a multi-year growth opportunity, and TSMC has it. We need to realize that AI just became popular two years ago, and this technology is a key enabler of many structural changes that we haven’t even identified yet. What’s clear is that chip companies are racing to develop powerful processors that make machines improve humans’ lives, and TSMC is their go-to manufacturer.
Additionally, TSMC is at the cusp of a cyclical upturn in the semiconductor space just like ASML (ASML), which is also at an inflection point. TSMC just posted August sales numbers, which showed a 33% year-over-year growth in consolidated revenue, and that’s just indicative of how important it is right now to the industry. Right now, the world is focused on LLMs, and we aren’t even considering the role TSMC’s chips are going to play in autonomous driving, gene editing, and cancer detection, among many other use cases.
Moreover, I want to point out that TSMC is highly profitable and has room for further margin expansion. The company’s TTM operating margin sits at 42% currently, down from about 50% in 2022. With its unit economics improving and its customers generating higher profits, I believe TSMC can raise prices and expand margins. Morgan Stanley (MS) analysts predict that the company’s gross margins will rise to 60% (from the current TTM gross margin of 53.3%) between 2028 and 2030 as overseas fabs increase production.
TSM Stock Is Still Cheap
Lastly, I believe that TSMC is one of the best current ideas because of its cheap valuation. It’s trading like an ex-growth company at a forward P/E of 20. This is not expensive for a company that’s a key enabler of almost everything high-growth right now. Analysts on Wall Street expect earnings to grow by 27% this year and similarly next year. I do not like projecting too much into the future, but I don’t see TSMC struggling to maintain double-digit earnings growth over the next several years.
Additionally, TSMC’s current market cap of $784 billion suggests that investors expect it to earn $37 billion in profits annually. Considering the company’s TTM net income is about $30 billion, I don’t see that number out of reach. If it generated those profits when its industry was in recovery mode, it should generate considerably larger profits as business starts booming again.
Analysts’ Take on TSM Stock
On the Street, TSM stock has a consensus Strong Buy rating based on 5 unanimous Buy recommendations. The average price target of $205 represents an upside of 13.16% from current levels.
The Bottom Line
TSMC is well-positioned to fly higher as chip companies like Nvidia race to push cutting-edge GPUs to the market to facilitate AI’s many use cases. The company is a key player in the AI investment trend and has a lot of room for margin expansion, all thanks to its enormous moat. TSMC’s full potential is yet to be explored as AI evolves beyond LLMs and its applications in autonomous driving and healthcare gain traction. Therefore, TSMC is a long-term name to own, not trade, and it’s currently on sale.
