Taiwan Semiconductor Manufacturing (TSM 1.26%) -- aka TSMC -- has made a lot of its investors rich since it publicly listed its ADR shares in the U.S. in 1997. If you had invested $33,000 in that initial offering, and reinvested your dividends over the years (after it started paying them in 2004), your TSMC holdings would be worth about $1.08 million today.
But could TSMC's long-term catalysts allow it to turn a $33,000 investment into more than $1 million again over the next three decades?
Image source: TSMC.
Why did TSMC generate millionaire-making gains?
From 1997 to 2013, TSMC's annual revenue grew at an impressive compound annual rate of 17% in U.S. dollar terms as it shrunk its process nodes -- i.e., the sizes of the features on its chips -- from 180 nanometers to just 20nm. (The smaller the features, the more transistors can be fit on a chip, and the more powerful and energy-efficient that chip will be.) That persistent trend of miniaturization enabled it to remain the world's largest contract chipmaker as other third-party foundries struggled to keep up.
But in 2014, Apple shifted its chip orders from Samsung's foundries to TSMC's. Under that partnership, Apple financed TSMC's initial orders of high-end extreme ultraviolet (EUV) lithography systems from ASML (ASML 2.04%), which were required for the production of Apple's top-tier chips. TSMC's adoption of EUV systems before its closest premium competitors -- Samsung and Intel (INTC -9.20%) -- enabled it to pull ahead in the "process race" to produce smaller and denser chips.
That's why TSMC's revenue continued to grow at a fairly steady compound annual rate of 16% from 2013 to 2022, even as the pandemic, geopolitical conflicts, and other macro headwinds disrupted the semiconductor market. Fabless chipmakers like Apple, AMD, Nvidia, and Qualcomm still rely on TSMC to produce their newest 7nm and 5nm chips.
How much larger could TSMC grow in 30 years?
TSMC suffered a revenue slowdown over the past year as sales of PCs withered in a post-pandemic market, the 5G upgrade cycle for smartphones ended, and the macro headwinds curbed the growth of various other markets. That's why analysts expect its revenue to decline 5% this year.
But from 2023 to 2025, analysts expect TSMC's revenue to rise at a compound annual rate of 20% as it starts to mass-produce its next-generation chips. It started mass-producing its newest 3nm chips in late 2022, and it plans to start producing 2nm chips in 2025.
Upon reaching the 2nm node, TSMC will need to adopt ASML's newest high numerical aperture EUV systems to produce sub-2nm chips. Making that difficult transition without a hitch could propel it comfortably ahead of Intel and Samsung, and ensure that TSMC remains the world's most advanced contract chipmaker for the foreseeable future.
Let's assume that TSMC's valuations hold fairly steady over the long haul from 2023 to 2053. If the company grows its top line at a compound annual rate of just 8%, to wind up with a holding of more than $1 million at the end of the period, you would need to invest only about $60,000 today. (This also assumes that its dividend yield averages about the 2% or so that it has since the payout was initiated, and that you reinvest your dividends.) Not quite as amazing as its results over the past 26 years, but still impressive.
Further, its past results suggest it could easily clear that revenue growth rate bar -- especially as more powerful, better connected, and AI-driven devices buoy the market's demand for fresh chips.
But TSMC still faces unpredictable headwinds
TSMC has a clear path toward generating more millionaire-making gains, but its long-term growth could still be derailed by unpredictable geopolitical and competitive challenges.
It still produces its most advanced chips in Taiwan. In a worst-case scenario such as a Chinese blockade or invasion of the island, TSMC's sales would plummet and take down the global semiconductor market. The company is offsetting that risk by building more overseas plants, but it remains committed to producing its top-tier chips in Taiwan as part of the country's "silicon shield" strategy.
TSMC will also continue to be squeezed by the tech war between the U.S. and China. It has already been barred from producing high-end chips for Chinese tech giants like Huawei, and stiffer sanctions could disrupt its production for other chipmakers (like Nvidia) that sell chips to Chinese companies. That pressure will likely drive Chinese chipmakers to accelerate their development of more advanced chips -- and any major breakthroughs they make could loosen TSMC's iron grip on the high-end market.
Lastly, Intel and Samsung remain committed to keeping pace with TSMC in the process node race, and both chipmakers receive generous government subsidies. If Intel and Samsung finally catch up with TSMC, they could lure away some contracts from fabless chipmakers that don't want to be so exposed to the messy tensions between Taiwan, China, and the United States.
Is TSMC a solid long-term investment?
Investors should be mindful of all those challenges, but I believe TSMC's strengths easily outweigh its weaknesses. Intel and Samsung have repeatedly failed to catch up to TSMC over the past several years, and a Chinese invasion of Taiwan would likely sink the entire market along with TSMC -- so it's futile to fret about that type of black swan event. Its stock still looks cheap at 16 times forward earnings, and it remains one of the easiest ways to profit from the cyclical recovery of the chip market.
