Industry forces could again align for Taiwan Semiconductor (TSM -1.02%). The world's leading third-party chip manufacturer experienced a significant slowdown as its industry experienced a downturn following the post-pandemic boom.
Today, the downturn appears to be ending, meaning TSMC (as it's known for short) can better capitalize on an artificial intelligence (AI) boom in its industry. As more customers demand the most advanced chips for AI and other purposes, it should lead the way for the stock to achieve record highs in 2024 and perhaps beyond.
The state of TSMC
TSMC's stock has followed the trajectory of most of the semiconductor companies it serves. The lockdowns in 2020 and 2021 led to an industry boom with much of the world's work moving away from the office. That frontloaded much of the growth that would have likely happened in later years, leading to a downturn in 2022.
Now, the need to support activity related to AI appears to have sparked another boom cycle. With TSMC claiming 58% of the third-party chip manufacturing market in the third quarter of 2023, most of the benefit naturally flows to it.
In a sense, that dominance poses a threat to the company by attracting more competition. Its most prominent competitor for advanced chip production, Samsung, claims about 12% of the market share.
Moreover, Intel's Intel Foundry Services (IFS) has emerged as a top 10 third-party producer with machines bought from ASML. That potentially gives Intel the ability to compete at the top end of the chip market.
TrendForce estimates that the island nation of Taiwan controls 46% of worldwide chip production, a figure rising to 68% when considering the world's most advanced chips. Amid heightened geopolitical activity in the region, manufacturers have scrambled to produce more chips outside of the country.
That includes TSMC, which has invested heavily in a facility -- also known as a fab -- in Arizona. And companies are looking to fabs such as IFS.
Warren Buffett reversed Berkshire Hathaway's decision to own TSMC due to the geopolitics in that region. That is a reminder of the potential dangers the chip manufacturer faces.
Why TSMC is likely to rise
Despite such concerns, customers must turn to TSMC for the most advanced chips, making it unlikely that it will lose its clients as long as it can maintain that lead.
But amid the recent slump, the financials reflect the downturn of the past. In the first nine months of 2023, revenue of $50 billion fell 6% compared with the same period in 2022. Likewise, net income of $19 billion dropped 17% amid a slight increase in the cost of revenue and a double-digit rise in operating expenses.
Moreover, in the first three quarters of 2023, TSMC spent $25 billion on property, plant, and equipment, leading to free cash flow of just $2 billion for the period.
Still, that investment should pay off in the long term as it seeks to meet an anticipated demand increase for the most advanced chips. Such signs of recovery in the industry could explain why TSMC stock is up 34% over the last year.
NYSE: TSM
Key Data Points
And even with the falling profits and a stock price almost 30% below its all-time high, its price-to-earnings ratio stands at 19, a low level in relation to where it has traded over the last five years. As rising demand for chips leads to a sector turnaround, that ratio could fall, becoming a catalyst that could take TSMC stock higher.
Consider TSMC stock
Thanks to an AI-driven increase in semiconductor demand, TSMC stock is well positioned to set new all-time highs. With its technical edge, it remains the leading producer of semiconductors for fabless chip companies, which seems to have positioned it well as the chip sector recovers.
Competition is rising, and the desire to move production away from Taiwan could affect some aspects of its business. But as long as TSMC can keep delivering the most advanced chips, its stock is unlikely to stay at current levels for long.
