In spite of its first annual revenue decline since 2019, shares of Taiwan Semiconductor Manufacturing (TSM 1.26%) had a solid 2023. The stock rallied 40% on the year, and its market capitalization as of this writing is hovering around $530 billion.
It may be easy to write off TSMC's 2023 performance as attributable to AI hype, but there could be a far simpler reason for the stock's comeback. Is this the next $1 trillion tech giant hiding in plain sight?
A strong finish to a "weak" year
Much has been said about Nvidia's incredible success with its AI chips and systems, and TSMC will continue to be a beneficiary of that new computing technology since Nvidia is a big customer.
However, Nvidia and other aspiring AI chip designers are but one sales vertical for TSMC (albeit a fast-growing one). In the third quarter of 2023, the company reported High-Performance Compute (or HPC, which includes both data-center AI and some PC chip manufacturing) was 42% of revenue. Smartphone chips were another 39% of revenue. And as indicated by companies with an outsized exposure to consumer electronics like PCs and smartphones, industry inventory of chips is now far healthier than it was a year ago and setting up for a run of growth in 2024.
And right on cue, TSMC just provided an update on its Dec. 2023 revenue (it provides monthly sales results). December revenue was 176,300 New Taiwan dollars (NTD), or $5.8 billion. This represented an 8.4% year-over-year decline.
While that may not sound so exciting, bear in mind this is a vast improvement from TSMC's revenue earlier in 2023 when it was sporting mid-teens percentage declines in sales. And when adding up all revenue in Q4 (October to December), TSMC will be reporting revenue of 625,529 NTD (or $20.6 billion). In fact, revenue in October actually increased again from the year prior before the seasonally slower months of November and December kicked in. All told, TSMC notched a very healthy 19% sequential increase in revenue versus the $17.3 billion reported in Q3.
For the record, management had expected Q4 revenue of $18.8 billion to $19.6 billion a few months ago.
What's it to shareholders?
If a new run of revenue growth is just now starting -- driven by modest yet healthy gains in consumer electronics, as well as AI growth from customers like Nvidia -- TSMC's profit margins could be ready to rally as well.
As any manufacturing-based business, operating margins rise and fall in tandem with sales. Often there's some leverage at work, meaning margins fall faster than sales do during cyclical downturns (like the one in 2023).
Data by YCharts.
But the trend reverses during good times, which could mean TSMC's earnings could begin to run much higher in 2024. And valued at just 18 times trailing-12-month earnings per share, TSMC stock looks like a rock solid deal right now.
Of course, there's no telling if the recent uptick in semiconductor manufacturing activity will continue, or how long it will last. However, top companies within the semiconductor industry, as well as external researchers, all point toward chip sales reaching $1 trillion a year by 2030 -- nearly double where they were in 2023. TSMC remains the go-to manufacturer, so it could haul in the lion's share of manufacturing revenue in the coming years and pull in ample profit along the way.
All told, Taiwan Semiconductor Manufacturing could be the next $1 trillion market-cap business. A combination of higher sales, even higher profit growth, and a bit of valuation expansion could help TSMC reach that milestone in the next three to five years. This could be a great investment for 2024 and beyond.
