Where Will Taiwan Semiconductor Manufacturing Stock Be in 3 Years?

The foundry giant sits on a secular growth opportunity and it’s supercharging the expansion of the semiconductor market.

Taiwan Semiconductor Manufacturing (TSM -0.90%) shares have already delivered impressive gains of 30% in 2024, outpacing the S&P 500‘s 10% jump by a wide margin. The good news for investors is that the company, popularly known as TSMC, looks capable of sustaining its robust stock market run over the next three years as well.

Let’s see why that’s likely to be the case and why investors would do well to buy TSMC shares before they jump higher.

The semiconductor industry is poised for stronger growth

The demand for semiconductors is set to increase at a significantly faster pace in the coming years as compared to the past. The semiconductor industry generated $469 billion in revenue in 2018, a number that climbed to $527 billion in 2023, equaling a compound annual growth rate (CAGR) of 2.4%. Fortune Business Insights estimates that the global semiconductor market could generate annual revenue of $1.38 trillion in 2029. That would translate into a CAGR of 17%.

This sharp acceleration in the semiconductor market’s revenue going forward can be attributed to one key catalyst: artificial intelligence (AI). The market for AI chips alone is predicted to generate $156 billion in revenue in 2029 as compared to just under $15 billion last year, rising at a CAGR of 40%. This is great news for TSMC because the company’s expertise in manufacturing advanced chips places it in a nice position to capitalize on this lucrative opportunity.

Fabless chipmakers such as Nvidia, Advanced Micro Devices, Qualcomm, Marvell Technology, and others who design chips usually outsource their production to a foundry like TSMC. Given that these companies are currently in a race to churn out powerful and efficient AI chips, the demand for TSMC’s chips made using advanced process nodes has been going up.

For instance, in the fourth quarter of 2023, chips manufactured using 7-nanometer, 5nm, and 3nm process nodes accounted for 67% of TSMC’s quarterly revenue of $19.6 billion. That’s a big improvement over the year-ago period when TSMC got 54% of its $19.9 billion in revenue from selling 7nm and 5nm chips. It wasn’t selling 3nm chips in the fourth quarter of 2022, but just a year later, this process node accounted for 15% of its top line.

So on a year-over-year basis, TSMC’s revenue from advanced process nodes, which are 7nm or smaller, increased to $13.1 billion from $10.7 billion in Q4 2023. That’s a nice increase of 22%.

Popular AI chips such as Nvidia’s H100 and AMD’s MI300X are manufactured using the 5nm process node, and Nvidia is expected to manufacture the next-generation Blackwell AI graphics processing units (GPUs) on a 3nm node. Chip designers prefer a smaller manufacturing node for making powerful chips because the transistors on these advanced chips are packed closely together.

As a result, electrons move at a faster pace between these transistors, and they generate less heat because they need to travel a smaller distance. In other words, these advanced chips are capable of delivering higher computing power while consuming less energy. Not surprisingly, the adoption of TSMC’s most advanced 3nm process is set to increase this year, and this process node could produce more than 20% of the company’s revenue.

What’s more, TSMC predicts that the 3nm node could help its customers create end products with a value of more than $1.5 trillion over the next five years, indicating that the foundry giant itself could generate massive revenue from this node. All this explains why TSMC’s sales are anticipated to grow at a healthy clip in 2024 and the next couple of years, which could eventually translate into a solid share-price jump.

Here’s how much upside TSMC stock could deliver in the next three years

As the following chart indicates, analysts have substantially raised their revenue growth expectations for TSMC.

TSM Revenue Estimates for Current Fiscal Year data by YCharts

The current year’s revenue forecast points toward a 20% increase from 2023’s top line of $69.3 billion. In 2026, TSMC is expected to hit $110.5 billion in revenue, though it could deliver a higher number considering that it has been focused on aggressively expanding its manufacturing capacity. But even if it achieves $110.5 billion in revenue in 2026 and trades at 8.2 times sales at that time (equivalent to its five-year-average price-to-sales ratio), its market cap could jump to just over $900 billion in three years.

Based on TSMC’s current market cap of $705 billion, this semiconductor stock could deliver 27% gains over the next three years. However, the possibility of greater upside cannot be ruled out given the market may reward TSMC with a higher sales multiple than its current P/S of 10. That’s because AI stocks typically carry a premium valuation, and TSMC’s present P/S ratio is lower than many prominent names capitalizing on the proliferation of this technology.

Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Marvell Technology. The Motley Fool has a disclosure policy.

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