Taiwan Semiconductor Manufacturing (TSM 1.26%), also known as TSMC, is the world's largest, most advanced contract chipmaker. It manufactures the smallest, densest, and most power-efficient chips for "fabless" chipmakers like Apple, Nvidia (NVDA 6.18%), and Advanced Micro Devices, and it's widely considered a bellwether of the semiconductor sector.
But last year, Nvidia actually became the world's first trillion-dollar chipmaker instead of TSMC. That was a bit surprising, since TSMC still generates more annual revenue than Nvidia, but Nvidia's valuations were also inflated by the buying frenzy in artificial intelligence (AI) stocks over the past two years.
Image source: Getty Images.
Nvidia still has an enterprise value of $1.4 trillion today, while TSMC is only worth $460 billion. Could TSMC catch up and become a trillion-dollar chipmaker by 2030? Let's review its recent growth rates and roadmap for the future to find out.
Is TSMC's next growth cycle beginning?
TSMC's revenue generally rises and falls with the semiconductor sector's growth cycles. It experienced a major slowdown in 2019, when sluggish sales of smartphones created a supply glut in memory chips, but its growth accelerated again in 2020 as the trade war and pandemic turned that glut into a shortage.
TSMC continued to grow through 2021 and 2022 as new 5G smartphones hit the market, PC makers sold more systems for remote work and online classes, and data centers upgraded their servers to process more AI applications. In 2023, it suffered another downturn as the 5G upgrade cycle ended, the PC market cooled off, and the macro headwinds drove many companies to slow down their big data center upgrades. That's why its revenue and earnings per share (EPS) declined for the full year.
|
Metric |
2019 |
2020 |
2021 |
2022 |
2023 |
|---|---|---|---|---|---|
|
Revenue growth |
3.7% |
25.2% |
18.5% |
42.6% |
(4.5%) |
|
Gross margin |
46% |
53.1% |
51.6% |
59.6% |
54.4% |
|
EPS growth |
(1.7%) |
50% |
15.2% |
70.4% |
(17.5%) |
Data source: TSMC. TWD terms.
But for 2024, TSMC expects its revenue to grow in the "low to mid-20%" range in USD terms. During the conference call, CEO C.C. Wei attributed that acceleration to the "strong ramp" of its latest 3-nanometer chips, "strong demand" for its high-end 5nm chips, and "robust AI-related demand." Those comments strongly suggest TSMC is finally ready to grow again.
From 2023 to 2025, analysts expect TSMC's revenue to grow at a compound annual growth rate (CAGR) of 20% as its EPS increases at a CAGR of 14%. Those are impressive growth rates for a stock that trades at just 15 times forward earnings.
TSMC could face tougher challenges after 2025
TSMC started mass-producing its smallest 3nm chips in late 2022, and it plans to ramp up its production of 2nm chips in 2025. Rival Intel (INTC -9.20%), which aims to catch up to TSMC in the process race by 2025, plans to launch its 18A (1.8nm) chips (which could be comparable to TSMC's 3nm chips in terms of density) by the end of this year.
Intel is still one to two chip generations behind TSMC, but it's also adopting ASML's (ASML 2.04%) next-gen high-NA extreme ultraviolet (EUV) lithography systems -- which will be required to produce smaller chips beyond the 2nm node -- before TSMC. TSMC believes it can push its existing EUV systems to the limit to manufacture 2nm chips at a lower price, and it reportedly won't start using ASML's high-NA systems until after 2030.
That bold bet might save TSMC a lot of money, since ASML's high-NA systems cost about $300 million each, but it could also erode its defenses against Intel -- which plans to challenge TSMC by expanding its own third-party foundry services.
TSMC has an easy mathematical path toward $1 trillion
Assuming TSMC's valuations hold steady, it would only need to grow its EPS at a CAGR of 10% from 2023 to 2030 to double its stock price and boost its enterprise value to nearly $1 trillion. TSMC should easily achieve that growth rate -- even if the semiconductor market suffers another cyclical slowdown over the next seven years.
TSMC will probably only face two unpredictable challenges: Intel's aggressive attempts to catch up in the process race, and a potential military or trade conflict between China and Taiwan, where TSMC still manufactures its most advanced chips. But even if Intel catches up, it could struggle to pull away TSMC's longtime customers. If China actually tries to take over or blockade Taiwan, it would likely trigger a catastrophic market crash and crush most tech stocks along with TSMC.
Simply put, I believe TSMC will be worth well over $1 trillion by 2030. It still faces some near-term and long-term challenges, but I don't think any other company -- including Intel and Samsung -- can replace it as the world's top contract chipmaker.
