Taiwan Semiconductor Manufacturing (TSM -2.91%), better known as TSMC and the world's largest contract chipmaker, became the first Taiwanese company to list its shares on the NYSE in 1997. A $2,000 investment in its initial offering would have blossomed into to more than $35,000 today.
However, investors who missed TSMC's market debut could have still reaped some big gains by buying the stock at the beginning of 2014. That's when it struck major deals with Apple (AAPL -1.17%) and ASML (ASML -3.37%). A $2,000 investment on the first trading day of 2014 would be worth about $13,500 today. Let's see how those two deals solidified TSMC as a semiconductor superpower, how rapidly it grew over the past nine years, and if it will continue to grow.
Image source: Getty Images.
What happened in 2014?
In 2014 Apple shifted its chip orders from Samsung's foundries to TSMC. That change was long overdue since Samsung had evolved from Apple's manufacturing partner into a fierce competitor in the smartphone market.
But as part of that new partnership, Apple wanted TSMC to buy extreme ultraviolet (EUV) lithography systems from the Dutch semiconductor equipment maker ASML. ASML's EUV systems would enable TSMC to manufacture much smaller, denser, and more power-efficient chips than Samsung, but TSMC was reluctant to buy those systems -- which cost about $200 million each and required multiple planes to ship.
To soften that blow, Apple -- which needed the EUV systems to produce its A8 chips that year -- agreed to finance TSMC's initial purchases of ASML's systems. That agreement enabled TSMC to install EUV systems long before Samsung and Intel (INTC -2.11%) and made it the go-to manufacturer for the world's smallest and densest chips.
TSMC maintains that lead in the "process race" today. Samsung and Intel have both started to install more EUV systems, but both chipmakers are still at least a generation behind TSMC in terms of transistor density. That's why Apple, Advanced Micro Devices, Qualcomm, Nvidia, and other leading fabless chipmakers continue to rely on TSMC to produce their top-tier chips.
How rapidly did TSMC grow over the past nine years?
Between 1997 and 2013, TSMC's annual revenue grew at a compound annual growth rate (CAGR) of 18% as its net income increased at a CAGR of 16%. It shrunk its nodes from 180 nm to just 20 nm during those 16 years.
But that miniaturization process wasn't easy, and it became increasingly difficult and expensive to manufacture chips at smaller nodes. That's why AMD spun off its foundry division, GlobalFoundries, to become a fabless chipmaker in 2009. TSMC's domestic rival UMC also stopped developing smaller chips beyond the 14nm node in 2018, while Intel struggled with brand-tarnishing delays and shortages while transitioning from 14nm to 10nm chips.
Therefore Apple's foresight and initial funding enabled TSMC to rise above its peers. As a result, its annual revenue continued to grow at a CAGR of 16% between 2013 and 2022 -- even as it endured the trade war, COVID-19 pandemic, supply chain disruptions, and inflationary headwinds -- while its net income increased at a CAGR of 21%.
What's next for TSMC?
TSMC faces a near-term slowdown this year as the PC and smartphone markets cool off. The macro headwinds are also curbing the market's demand for new data center chips. However, TSMC expects that slowdown to end in the second half of 2023. It also plans to ramp up its production of its next-gen 3 nm chips, while installing more of ASML's newest "high-NA" EUV systems to produce even smaller chips beyond the 2 nm node. For now, it seems unlikely that Samsung or Intel -- which posted a disastrous fourth-quarter report in January -- will catch up to TSMC in the process race within the next few years.
Simply put, TSMC will likely remain one of the best long-term plays on the secular expansion of the semiconductor market. Between 2022 and 2025, analysts expect its revenue to grow at a CAGR of 11% as its net income grows at a CAGR of 6%. Those steady growth rates suggest it's still a bargain at 16 times forward earnings.
