Semiconductor stocks have been roaring higher over the past year as demand for artificial intelligence (AI) chips has surged, which is evident from the 57% gains clocked by the PHLX Semiconductor Sector index during the period. Foundry giant Taiwan Semiconductor Manufacturing (TSM 6.22%), popularly known as TSMC, has also benefited, clocking gains of 71% over the past 12 months.
This healthy surge in TSMC stock has brought the company's market cap to $910 billion, making it the eighth-largest company in the world. Moreover, it won't be surprising to see TSMC stock entering the trillion-dollar market cap club soon, as it is just 10% or so away from that milestone. Could it happen next year -- or even sooner?
NYSE: TSM
Key Data Points
TSMC's revenue growth has accelerated strongly this year
TSMC had a forgettable 2023 as weak smartphone and personal computer (PC) sales created poor demand for semiconductors. Its revenues declined by 9% to $69.3 billion while adjusted earnings dropped 21% to $5.18 per share.
However, the scenario has changed completely in 2024. TSMC recently reported a 30% year-over-year increase in its monthly revenue for May. Even better, its top line increased 27% year over year in the first five months of the year. At this pace, TSMC is on track to exceed the 23% revenue growth that analysts forecast it would deliver for 2024.
The good part is that there are multiple reasons why TSMC could indeed exceed Wall Street's forecasts. First of all, global semiconductor sales are expected to increase by 16% this year, according to the Semiconductor Industry Association. So far this year, TSMC is growing at a faster pace than the industry. That means TSMC is gaining share in the third-party foundry space, where it currently controls 61% of the market, well ahead of second-place Samsung's 11% share.
The reason why so many chipmakers are flocking to TSMC to get their chips manufactured is because it has the capacity to produce them using the most advanced process nodes, making chips that squeeze more computing power into less space and are more power efficient as well. Specifically, 65% of TSMC's total revenue is coming from chips made using its 3-nanometer (nm), 5nm, and 7nm process nodes, compared to 51% in the first quarter of 2023. These are the process nodes used for making AI-capable chips for data centers, smartphones, and personal computers.
Sales of these advanced chips are set to grow nicely in 2024 and beyond. According to market research firm InsightAce Analytic, sales of AI server graphics processing units (GPUs) are forecast to increase at an annualized rate of 30% through 2031. TSMC has become the go-to foundry partner for AI-focused chipmakers such as Nvidia, AMD, and Intel, all of which are using its advanced process nodes to manufacture AI server processors.
Meanwhile, sales of AI-enabled smartphones and PCs are forecast to increase at an annual rate of 35% over the next five years, according to consultancy Global Market Estimates. Given that major players in the PC and smartphone businesses such as Apple, AMD, Qualcomm, MediaTek, and Broadcom are all TSMC customers, the foundry giant is in a solid position to capitalize on the secular growth in these markets.
More importantly, TSMC is setting itself up to capitalize on the booming demand for the most advanced chips. It plans to increase the production capacity of its advanced chip nodes by 50% by 2027. Additionally, TSMC is going to build more chip manufacturing facilities in the U.S. with help from funds and loans it is set to receive from the Department of Commerce thanks to the CHIPS Act.
In all, there is a good chance that TSMC could outpace Wall Street's revenue estimate of $85 billion in 2024, and follow that with another solid year in 2025, when the analysts' consensus forecast is for revenue to jump to $103.5 billion.
Can the stock soar enough to join the trillion-dollar club?
TSMC is currently trading at about 12 times sales. Assuming it continues to trade at this valuation and indeed generates $85 billion in revenue in 2024, its market cap would rise to just over $1 trillion within the next year.
One reason why TSMC may be able to maintain its current sales multiple, which is a premium to its five-year average sales multiple of 8.3, is because of its improved growth prospects thanks to AI. Moreover, if the company outperforms consensus estimates in the coming quarters, there is a solid chance that TSMC stock could jump by 10% from current levels, lifting it into the trillion-dollar market cap club.
