If you've got $1,000 burning a hole in your pocket, there is one stock I'd recommend buying right now: Taiwan Semiconductor (TSM 1.26%). This industry leader in chip production is nearing a new cycle in its business. However, the market hasn't reacted to it yet.
Read on to discover why TSMC is such a great buy now and why it deserves a spot in your portfolio.
Taiwan Semiconductor is already developing the next generation of chips
Taiwan Semiconductor is in a unique market position. Because it is a contract semiconductor factory, it provides the chips necessary to build a wide variety of products, including Apple iPhones and Nvidia graphics processing units (GPUs) used for powering artificial intelligence (AI) models.
The reason TSMC partnered with these tech giants is that its technology is industry-leading. With powerful 5nm and 7nm (nanometer) chips, TSMC helped usher in a new age of computing performance. However, Taiwan Semiconudctor's new 3nm chips promise even more gains. 3nm chips offer 70% logic density gain, making the chips up to 15% faster while saving 30% more power.
That technology allows smartphones to become more powerful with each release while maintaining their compact size. While 3nm chips haven't achieved full production rates yet, TSMC's already working on the next generation after 3nm: 2nm chips. This technology (slated to come to market in 2025) will offer 10% to 15% more performance while consuming 25% to 30% less power than its 3nm counterparts.
This continuous wave of innovation has turned TSMC into the powerhouse it is today. It's this same innovation that will also make Taiwan Semiconductor a great investment in the future. However, its latest 3nm technology still hasn't affected its finances.
Taiwan Semiconductor hasn't seen the benefit of 3nm chips yet
5nm and 7nm chips comprised 51% of Taiwan Semiconductor's revenue during the first quarter. 3nm chip revenue wasn't reported, which shows TSMC has not seen a benefit to the technology yet.
As a result, TSMC's margins should improve over the coming quarters, as it has already spent the money through hiring and capital expenditures to create the product.
We also know that TSMC has already hit the high end of second-quarter expectations. Because TSMC provides investors with monthly revenue updates, we already know that its revenue was NT$481 million for Q2. Using management's projections of a $1 to NT$30.4 exchange rate, we can extrapolate that Q2's revenue was $15.8 billion if the exchange rate holds.
While we'll have to wait until July 20 for detailed results, it's a positive sign for a company to come in at the high end of revenue expectations. Still, this would indicate revenue declining 13% in U.S. dollars and 10% in New Taiwan dollars.
TSM Revenue (Quarterly) data by YCharts
This is just the reality of investing in the semiconductor space; there will be ups and downs. However, the downs aren't expected to last long, as Wall Street analysts expect Taiwan Semiconductor's revenue to grow by 22% next year. Additionally, it expects earnings per share (EPS) of $5.13 and $6.40 in 2023 and 2024. That would value the company at 20 and 16 times 2023 and 2024 earnings, respectively.
That's not a bad price to pay for the stock, especially considering the powerful products it has a clear path to launching.
With a good price and a strong future ahead of it, Taiwan Semiconductor makes for an excellent purchase now. While investors will need to be patient with the stock as the chip industry fluctuates, it can be a great investment over the long term if you plan to buy and hold on to the stock.
