Taiwan Semiconductor Manufacturing (TSM -0.43%), popularly known as TSMC, is the world's leading semiconductor foundry, which supplies chips to the top chip designers. Its shares shot up 10% on Nov. 15 after it emerged that the company of famous investor Warren Buffett -- Berkshire Hathaway -- bought a $4.1 billion stake in the Taiwan-based company.
Buffett's move brought respite to beleaguered TSMC investors, who have witnessed a 38% slide in the stock's value in 2022 despite a string of impressive quarterly results. But can this semiconductor bellwether sustain its newly found momentum and fly higher in 2023? Or will the negativity surrounding tech stocks hang heavy on TSMC stock next year and cause it to crash once again? Let's find out.
Why TSMC stock could soar in the new year
The sell-off in Taiwan Semiconductor Manufacturing's stock this year isn't justified if we look at the pace at which its revenue and earnings have increased.
TSM Revenue (TTM) data by YCharts
The semiconductor bellwether's third-quarter revenue shot up 36% year over year to $20.2 billion. Its earnings jumped to $1.79 per share from $1.08 per share in the year-ago period. TSMC's Q4 guidance was also solid, and the company expects to finish the year with a 32% spike in revenue to $75 billion.
It is worth noting that TSMC is on track to deliver this impressive growth in 2022 despite pockets of weakness in certain semiconductor niches such as smartphones and personal computers. The robust demand for chips used in the Internet of Things, vehicles, and data centers, plus TSMC's relationship with Apple -- which has defied the smartphone slowdown -- are the reasons it has been putting up solid numbers.
The good news for Taiwan Semiconductor Manufacturing investors is that analysts expect global semiconductor demand to head higher in 2023, generating more than $662 billion in revenue as compared to this year's estimate of $633 billion. TSMC is nicely positioned to corner a nice chunk of this incremental revenue opportunity, as its share of the semiconductor foundry market stood at 56% in the second quarter, according to Counterpoint Research. The company is way ahead of second-place Samsung, which controlled just 13% of the foundry market in Q2.
To put it simply, the secular growth of the semiconductor industry should ensure another solid year in 2023 for TSMC. But more importantly, the company is built for long-term growth, as analysts expect its earnings to grow at an annual pace of 21% for the next five years.
Do investors have anything to worry about?
The health of the semiconductor industry and TSMC's robust market share suggest that investors don't have much to worry about going into 2023. At the same time, Bank of America suggests that stocks could go on a bull run next year, as it expects inflation to cool to 4% by the middle of 2023.
Of course, a hawkish Federal Reserve has been bad news for equities this year, but the latest consumer price index data for October revealed that the inflation rate cooled to 7.7%, down from 8.2% in September. As a result, it won't be surprising to see the Fed reduce the pace of rate hikes, and that could send the stock market soaring next year.
The positive stock market sentiment combined with TSMC's prospects can help the Taiwanese giant make investors richer in 2023. This may explain why Buffett picked up a stake in the company, especially considering its cheap valuation.
TSMC's price-to-earnings ratio of 14.5 is lower than its five-year average of 23 right now. The earnings multiple also represents a discount to the S&P 500's multiple of 19. All this indicates why this semiconductor stock could turn out to be a top pick for 2023. It also shows why it may be a good idea to follow Buffett's lead and buy TSMC, as it could go on a bull run in the new year.
