Taiwan Semiconductor Manufacturing stock (TSM) has soared nearly 100% over the past year, marking its strongest rally since 1999. While such a historic surge might deter investors wary of buying at the peak, TSM’s upside potential is far from over, in my view. Fueled by a booming generative artificial intelligence (AI) market, TSM’s growth has accelerated, driven by its dominance in advanced chipmaking technologies. Along with a multi-year growth runway that is still intact and a reasonable valuation, I remain bullish on TSM stock.
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What’s Driving the Bullish Sentiment in TSM Stock?
TSM’s phenomenal performance this past year has been primarily fueled by its critical role in the thriving AI market. As you can guess, generative AI has unleashed unprecedented demand for high-performance chips, placing TSM as a vital player in the space. The company’s advanced 3-nanometer and 5-nanometer technologies have captured the lion’s share of this demand, driving notable revenue growth. This is due to the company’s near-monopolistic dominance in cutting-edge fabrication processes, enabling TSM to capitalize on these tailwinds in a unique way.
This one-of-a-kind market positioning has translated into a dramatic reversal in TSM’s growth course this year. Specifically, in Fiscal 2024, revenue growth surged to 17% in Q1, 40% in Q2, and 39% in Q3, marking a sharp improvement from the 5% revenue decline reported in Fiscal 2023. Besides for the ongoing AI boom, it’s worth noting that TSM’s unmatched capacity to meet the various unique demands of its clients has also played a significant role in its recent performance. From hyperscalers to innovators in the AI chip space, everyone relies heavily on TSM’s capabilities to bring their products to life, reinforcing the bullish sentiment around the stock.
FY2024 Marks a Record Year for Revenues and Earnings
Looking at TSM’s year-to-date results, it’s clear that Fiscal Year 2024 is shaping up to be a landmark year for the company. In the post-earnings call of its most recent Q3 earnings, management stressed that top-line revenue contributions from AI server processors are anticipated to triple this year, accounting for a notable portion of total revenues. As disclosed in TSM’s monthly sales updates that followed, October and November recorded exceptional growth of 29% and 34%, respectively, supporting management’s forecast and signaling a strong close to the year.
Wall Street’s consensus aligns with the present optimism as well, projecting TSM’s record annual revenues of $88.2 billion—representing a 29% year-over-year increase. EPS is forecasted to hit $7.03, a 34% surge compared to last year. As noted, sales growth is backed by unprecedented demand for TSM’s industry-leading fab tech. At the same time, efficiency gains and higher capacity utilization rates across its production facilities have further boosted profitability.
Valuation Is Still Attractive Despite the Rally
Now, as I noted in the introduction, with shares nearly doubling over the past year, some investors appear hesitant to buy the stock at today’s levels, fearing they might be purchasing at its peak—a risk that could lead to downside following a potential correction. However, I believe TSM is still reasonably valued. Now with the stock currently trading at roughly 29 times this year’s projected EPS, it may seem pricey at first glance, especially considering it’s a semiconductor company in a cyclical industry. Yet, the context of this valuation paints a more favorable picture. TSM is poised to benefit from a sustained multi-year AI-driven growth cycle, which could lead to explosive earnings growth far beyond 2024.
To elaborate on this point, Wall Street estimates EPS growth of 27% for FY2025 and 16% for FY2026, with the potential for even higher results if the AI market’s momentum exceeds expectations. In my view, this outlook makes TSM’s current multiple relatively modest, considering its strategic positioning at the heart of AI innovation. With demand for its advanced nodes (i.e., 3-nanometer and 5-nanometer technologies) outpacing supply and a robust roadmap extending to future nodes, I believe that TSM is primed to deliver significant shareholder value for years to come, even from today’s seemingly lofty share price levels.
Is TSM Stock a Buy?
Wall Street analysts remain highly optimistic about TSM’s prospects, even in light of the stock’s extended rally. Specifically, TSM stock features a Strong Buy, with analyst ratings consisting of 5 unanimous Buy ratings over the past three months. At $232.50, the average TSM stock price target implies an upside potential of 14.50% from its current levels.
For the best guidance on buying and selling TSM stock, look to Brad Lin, representing Bank of America Securities’ (BAC). He is the most accurate and most profitable analyst covering the stock (on a one-year timeframe), boasting an average return of 50.85% per rating and a perfect success score of 100%.
Summing Up
In conclusion, Taiwan Semiconductor Manufacturing likely remains a compelling investment despite its remarkable rally. The company’s dominance in advanced chip technologies and its essential role in the booming AI market position it for sustained growth. Combining Wall Street’s exciting revenue and EPS growth projections and a reasonable valuation relative to its long-term potential, I argue that TSM’s growth story appears far from over, even if some believe they’ve already missed the train.
