The importance of semiconductor chips has become more evident as the world has become more digital. Unfortunately, COVID-19 and its lingering supply chain effects have caused a shortage of chips in the past few years. While the worst may be over for the chip shortage, we're still not in the clear.
Despite the shortage, there's one company that presents investors will a compelling long-term opportunity: Taiwan Semiconductor Manufacturing (TSM 1.26%). TSMC is the world's leading semiconductor foundry, specializing in personalized advanced chips. You may not know TSMC by name, but it's all but guaranteed that you own a product using their chip(s) if you own any electronics. They're in smartphones, car entertainment systems, computers, and many other consumer electronics.
Rather than mass-producing chips for general sale, TSMC builds chips specifically designed for their client's respective needs. It's a business model that's boosted TSMC to become the 10th-most valuable public company in the world.
An AI chain reaction is bound to happen
There's no escaping the AI hype in the tech sector at this point. A lot is still to be seen on how it transforms industries, but it's safe to say it's here to stay. That's great news for TSMC, as it stands to profit indirectly from it. It should be a lucrative domino effect.
Large language models that train and power AI apps (like OpenAI's ChatGPT) require lots of data -- and that's putting it lightly. This large amount of data isn't stored on a few external hard drives, either. It's stored and processed in huge data centers that require advanced processing capabilities.
That's where companies like Nvidia come into the picture. These companies build GPUs (basically computer engines) that power the data centers, and TSMC is the primary manufacturer of the chips they use. Without TSMC, the AI pipeline is greatly disrupted.
JPMorgan Chase expects AI-related revenue only to be around 5% of TSMC's revenue this year but predicts it could grow to 10% by 2026.
TSMC's revenue struggles could be over soon
It's been a struggle for foundries globally, with the top 10 witnessing revenue declines of over 18% from Q4 2022 to Q1 2023. TSMC's revenue hasn't been exempt, down over 16%. It's likely to continue that way for the next couple of quarters, but there are signs of brighter days ahead.
Analysts expect TSMC's 2023 revenue to be down year over year but make a rebound next year, growing over 22%. Accomplishing that would get it back on track with the revenue growth we're used to seeing from the company. Its objective is annual revenue growth between 15% to 20% until 2026.
Data by YCharts
Any change of course for TSMC's revenue should be a huge catalyst for its stock price.
Enough market share to ensure longevity
The closest threat to TSMC's continued dominance is Samsung. In a recent lecture, the president and head of Samsung's semiconductor business said its foundry technology is "one or two years behind TSMC's," and it could pass TSMC's in five years. While it sounds good, those are very ambitious words, and it's not likely to affect TSMC's market dominance in the near future.
As of Q1 2023, TSMC has a 60.1% market share in the third-party chip manufacturing business, according to TrendForce, up from 58.5% the previous quarter. Samsung is second, with 12.4% market share, down from 15.8%.
TSMC's willingness to innovate and stead ahead of the curve has been the catalyst to its success so far. There's no reason to believe this will change anytime soon.
