Many components are necessary for complicated devices like cellphones and graphics processing units, and none are more vital than the microscopic chips that provide the computing power. Among the chip manufacturers, none is more important than Taiwan Semiconductor (TSM 0.14%), the world's largest contract chip manufacturer.
It's already a monster with a $536 billion market cap. But could it grow enough to reach $1 trillion by 2030? Let's take a look.
Taiwan Semiconductor has some big-name clients
As the name implies, Taiwan Semiconductor (also commonly referred to as TSMC) is based in Taiwan. However, it's made several investments in the U.S., most notably its chip plant in Arizona. While this facility has had multiple problems starting up, it will eventually provide an additional source for these vital chips.
Among the reasons TSMC has been so successful is due to its best-in-class technology. Likewise, Samsung and Intel are among its chief competitors; however, they compete with many of Taiwan Semiconductor's largest clients, like Apple, Nvidia, and AMD. These companies don't want to give their business to competitors, so they'd rather give it to a neutral third party like Taiwan Semiconductor.
When it comes to technology, Samsung and TSMC have left Intel in the dust. Taiwan Semiconductor is ramping up its production of 3 nm (nanometer) chips and is scheduled to start producing 2 nm products in 2025. Additionally, there are rumors of 1.4 nm chips being developed after that. Taiwan Semiconductor has a built-in revenue escalator every couple of years when it launches new products.
Upgraded chips and the demand for technology will push TSMC higher over the next decade. But will it be enough for the company to cross the $1 trillion valuation threshold?
The stock trades at a discount to the market
At its peak in early 2022, Taiwan Semiconductor held a market cap of nearly $730 billion. However, as chip demand subsided in 2022, the stock came tumbling down. This has weighed on TSMC's financials throughout 2023, although management believes the chip supply glut has nearly bottomed.
This sets the stage for a strong rebound in 2024 and beyond, as Wall Street analysts project 20% revenue growth in 2024. They also believe it will produce earnings per share of $6.12.
The downturn Taiwan Semiconductor's stock experienced in 2022 wasn't all due to a shrinking business. Some of it had to do with multiple contraction, which happens when investors aren't willing to pay as high a price for a stock than they normally would.
TSM PE Ratio data by YCharts
With Taiwan Semiconductor settling in around its long-term average, the stock looks fairly priced from a historical perspective. However, I'd argue that this price doesn't fully value the company. The S&P 500 trades at about 26 times earnings right now, which means the stock trades at a 29% discount to the market.
I have a hard time believing that Taiwan Semiconductor is a below-average business in the S&P 500, and if Taiwan Semiconductor can achieve analysts' projections for 2024 and trade at an earnings multiple of 22, it will have a market cap of nearly $700 billion.
If TSMC can grow its earnings at a 12% pace for five years (taking it to the start of 2030), it will be worth $1.23 trillion. Those don't seem like far-fetched estimates, and they make a pretty solid case for Taiwan Semiconductor to be worth at least $1 trillion by the start of 2030.
Furthermore, this would represent a compound annual growth rate of 14.9%, which would demolish the long-term returns of the broader market.
As a result, I think Taiwan Semiconductor will be an excellent investment over the next five to 10 years.
