I don’t believe it’s out of reason to think semiconductors are as important to the global economy as food, air, and water are. Semiconductors are the backbone of modern computing, with just about every device we use depending on them. That includes smartphones, laptops, routers, and various household appliances. businesses in almost every industry worldwide depend on semiconductors, just as we are in our daily lives. Without the largest semiconductor foundry, Taiwan Semiconductor Manufacturing Company (TSM), the global economy would grind to a screeching halt.
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The stock gained 85% in 2024 and has been one of Wall Street’s biggest winners this year. Yet, after its most recent earnings, I believe TSMC has more room to run. As I’ll discuss, the ongoing revolution in artificial intelligence pushes demand for semiconductors to new heights. That bodes well for TSMC, so I’m starting coverage with a Buy rating.
TSMC Beat Expectations with Ease in Q3
The first factor supporting my Buy rating is TSMC’s third-quarter earnings results, shared on October 17th. The company’s revenue surged 39% higher than the corresponding period, to $23.5 billion during the quarter. For more perspective, it exceeded analysts’ consensus by $500 million. TSMC’s CFO, Wendell Huang, attributed this robust top-line growth to growing demand for 3nm and 5nm technologies (e.g., smartphones and AI). Also, the company’s diluted EPS soared 54.2% year-over-year to $1.94 per ADR unit, exceeding analysts’ consensus of $1.77 for the quarter. Margin expansion led to diluted EPS growth to outpace revenue growth in the quarter.
Growth for TSMC Remains in the Early Innings
As hard as it is to imagine, for a nearly trillion-dollar company, I am bullish on TSMC because it is a truly commanding enterprise. According to Tipranks’ writer Oliver Rodzianko, TSMC holds an approximately 90% share of the global advanced chip market. This level of market dominance is highly impressive and suggests that the company enjoys a wide competitive moat. This means that TSMC is likely to at least maintain its market share, if not grow it further in the future.
Another promising piece of the puzzle is that TSM operates in an industry that is set to continue growing tremendously. Per forecasts from Statista, the global semiconductor industry is expected to compound by 10.1% annually from $607.4 billion in 2024 revenue to nearly $1 trillion by 2029. As TSMC continues ramping up capacity to meet growing customer demand in the coming years, double-digit annual revenue growth should persist. Along with further margin expansion, that’s why the analyst consensus is for diluted EPS to jump by 29.7% in 2025 to $9.08. Another 19.7% rise in diluted EPS to $10.87 is anticipated for 2026.
TSMC’s Dividend Can Keep Rising
TSMC’s dividend and stable balance sheet offer two more arguments for my Buy rating. The stock’s 0.9% dividend yield aligns with the technology sector average yield of 1%. Additionally, the payout looks poised for double-digit annual growth for the foreseeable future. This is because it’s predicted that TSMC’s payout ratio for 2025 will be in the high 20% range. That leaves the company with plenty of capital to invest in research and development and capital projects to spur future growth.
On the balance sheet side of the equation, TSMC finds itself in an admirable position. The company’s net cash and marketable securities position as of September 30th, 2024, was approximately $33 billion. That has helped TSMC to benefit from the high interest rate environment, generating $1.7 billion in net interest income through the first nine months of 2024. Finally, this rock-solid financial health backs up the company’s AA-credit rating from S&P Global (SPGI) on a stable outlook.
More Upside Could Be Ahead for TSMC Stock
As contradictory as it may seem for a stock that has nearly doubled in 2024, TSMC’s valuation is reasonable enough to bolster my case for a Buy rating. That’s because the stock’s forward P/E ratio of 20.9x is less than the five-year average P/E ratio of 23.1x. My 12-month forward fair value of around $210 a share would work out to an approximately 10% discount to fair value from current levels. Keep in mind that this fair value also doesn’t consider that TSMC is likely to continue to beat analysts’ expectations as it has consistently done in recent years. This could push my fair value a bit higher.
Is TSMC a Buy, According to Analysts?
Turning to Wall Street, analysts have a Strong Buy rating consensus for TSMC. All five analysts covering the stock have issued Buy ratings in the last three months. The average 12-month price target of $205.00 signals the potential for a 9.63% upside from the current share price.
Conclusion
I believe TSMC stands out as one of the best ways to play a part in the ongoing AI revolution. The company has earned an unmatched reputation in an industry with one of the highest growth prospects in the global economy. TSMC’s dividend looks to have a growth runway ahead, and the balance sheet makes it even more stable. While not the bargain it was at the start of this year, a compelling case can be made that TSMC still has a double-digit near-term upside ahead, in addition to the potential for solid medium-term returns. That’s why I’m assigning a Buy rating to TSMC.
