Taiwanese semiconductor and integrated circuit maker Taiwan Semiconductor Manufacturing (NYSE:TSM), known as TSMC, has had a banner year in the midst of surging AI interest. TSM stock has risen by 69% in the last year, outpacing the benchmark iShares Semiconductor ETF (NASDAQ:SOXX), which has climbed by 45.7% in the same period. Despite these significant gains in recent quarters, TSMC appears poised for further gains.
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The company enjoys a tremendous industry advantage in terms of market share and partnerships with leading AI companies, allowing it the flexibility to raise prices with the market. It is also in the midst of a significant expansion of its manufacturing facilities. Finally, its highly-anticipated 2-nanometer technology is expected to be an industry leader.
These are some of the factors that lead Wall Street analysts to make bullish predictions about TSMC. I echo these optimistic ratings and suggest that there may still be room for gains, even after a major rally this last year.
Leading Foundry Market Share and Major Growth
In the rush to accommodate companies’ AI needs with increasingly powerful hardware, TSMC has emerged as a strong leader. As the world’s largest semiconductor foundry, TSMC enjoys a 60% market share in the foundry business, dramatically ahead of competitors like Samsung (OTC:SSNLF) at 13% and Intel (NASDAQ:INTC) at 2%.
TSMC’s dominance in the AI hardware market may more than make up for recent declines in its other primary business area: smartphones. Smartphone-related products accounted for 38% of first-quarter 2024 revenues, but they have been damaged in recent quarters due to a slowdown in the global smartphone market.
Fortunately, AI revenue may double this year, according to TSMC executives in the company’s last earnings call. Beyond that, the company expects AI-related revenue to grow at a CAGR of 50% over the next five years, eventually making up a fifth of the company’s total revenue.
Customer Relationships and Pricing Potential
TSMC has a unique structure in which it does not design, build, or sell semiconductor products under its own brand name, ensuring that it does not compete with its customers. This has aided TSMC in building unusually strong partnerships with customers, including chipmaker titan Nvidia (NASDAQ:NVDA), which currently accounts for about 10% of TSMC’s revenue.
With Nvidia operating on a steady schedule of launching new versions of its AI chips, and given Nvidia CEO Jensen Huang’s stated openness to TSMC price increases, it’s likely that this partnership will continue to expand. Further, with Nvidia willing to purchase higher-priced TSMC components, it’s likely that the rest of the AI chip industry will follow suit.
Manufacturing Expansion and Technology Leadership
Given the demand for its products, TSMC has rapidly expanded its fabrication capacity with new facilities around the world. It launched its first chipmaking plant in Japan earlier this year and, at the end of June, received $10.3 billion in government support to launch both a second plant in Japan and a new facility in Arizona. TSMC also anticipates a multi-billion-dollar grant from the U.S. government under the CHIPS and Science Act to further bolster its production capacity in Arizona.
Key to TSMC’s Arizona operations in the coming quarters is the fact that it expects to build its upcoming 2-nanometer (N2) line of products. This technology is expected to be the most advanced semiconductor technology at the time of its release, and it is slated for volume production by late 2025.
Strong Margin and Guidance
In addition to all of the above factors, TSMC’s strong margin expectations and earnings guidance make it easy to see why analysts have flagged this stock as having potential for future growth. TSMC has a savvy plan to optimize costs, even given the increased fees associated with overseas manufacturing. The company will use its pricing flexibility, government partnerships, and other tools to strive for a gross margin of 53% or above.
In its first-quarter earnings report, TSMC announced optimistic guidance for the second quarter, including revenues between $19.6 billion and $20.4 billion. This represents a midpoint increase of 27.6% relative to the same time last year. The company also has a history of beating its guidance figures for the last several quarters.
Is Taiwan Semiconductor Stock a Buy, According to Analysts?
After rallying in the last year, TSM shares are currently trading at $175.70. The average TSM stock price target is $182.56, representing 3.9% upside potential. The company currently has a Strong Buy rating based on 10 Buys, zero Holds, and zero Sells.
Conclusion: Market Leadership and Vast Potential
Few, if any, companies are as well-positioned as TSMC to benefit from the anticipated boom in AI technology and demand. The company’s dominance of the AI component market is unrivaled, and its stellar customer relationships allow it the flexibility to adjust pricing and other factors to optimize costs. The firm has the support of multiple governments to establish new foundry capacity, and its upcoming N2 tech is expected to lead the industry.
