Taiwan Semiconductor Manufacturing Company (TSM -1.06%) -- known to many as TSMC -- is the largest semiconductor foundry in the world. TSMC's foundry model, which other semiconductor manufacturers have since adapted, means the company doesn't produce chips for general sale. Instead, companies contract TSMC to make chips to fit their specific needs.
TSMC produces chips specifically designed for smartphones, cars, graphics processing units (GPUs), and dozens of other technologies that we use daily. This business model has worked well for TSMC, claiming a 56.4% market share in the global semiconductor foundry market as of the second quarter of 2023.
Thanks to a boost from AI-related hype and anticipated demand, TSMC's stock price increased over 40% in 2023. Even so, here are three reasons the company's stock could explode higher in 2024.
1. An increase in smartphone and PC demand could be near
The semiconductor industry is cyclical. When technology booms, demand and production increase. When demand drops or saturation occurs, oversupply and lower profits tend to follow. Over the past couple of years, the industry has been in the latter part of the cycle.
For TSMC specifically, the reduced demand for smartphones and PCs -- its two biggest business segments -- has taken a toll on its financials. In the third quarter of 2023, its revenue and net income decreased 10.8% and 25% year over year, respectively. Revenue for the first three months of 2023 was down 6.2% compared to the same period in 2022.
That said, it seems TSMC may be near the bottom of the cyclical downturn. In its third-quarter earnings call, TSMC's CEO, C.C. Wei, said the company was seeing "early signs of demand stability in PCs and smartphone end markets." He furthered it by saying, "2024 will be a very healthy growth [year]."
A rebound in the smartphone and PC markets would noticeably boost TSMC's top line since they are major contributors to its revenue. In the third quarter of 2023, smartphones and PCs accounted for 39% and 42% of TSMC's revenue, respectively. Luckily for TSMC, both smartphones and PCs are expected to rebound in 2024 and going forward.
TSM Revenue (Quarterly) data by YCharts
TSMC predicts revenue to be between $18.8 billion and $19.6 billion in the fourth quarter of 2023, which would be down, but it should be up from there if predictions go as planned.
2. TSMC's advanced chip-making ability sets it apart
There are plenty of companies in the semiconductor foundry space, including well-known Samsung. However, none of TSMC's competitors' chips compare to the advanced capabilities of its chips.
TSMC's competitive advantage involves the end stages of chip production and a process called "packaging." Packaging is enclosing the chip and putting in electrical connections vital for the chip's ability to function in different electronics.
The packaging process is done by any company that produces semiconductor chips, but TSMC has an extensive list of patents (close to 3,000) that protect its advanced chip-packaging technology. This technology allows TSMC to essentially stack and combine multiple chip components into a single item, leading to higher performance than others.
TSMC's advanced chip-making capabilities are why it's the go-to for many top tech companies like Apple, Tesla, and Nvidia. Add in an anticipated demand increase for smartphones and GPUs (thanks to their importance in training AI models), and TSMC's expertise should be in even higher demand.
I'm a long-term believer in TSMC
Nobody can predict how individual stocks will perform in the short term, including TSMC. It's in the right position and has all the right resources to continue its surge through 2024, but only time will tell how it plays out.
That said, TSMC is a stock that investors can feel comfortable holding on to for the long haul. It has a dominant market position, a diversified customer base that relies heavily on it, and a history of innovation -- all of which are recipes for sustained long-term success.
