The past five years have been great for investors in Taiwan Semiconductor Manufacturing (TSM +6.30%), popularly known as TSMC. Share prices of the company have shot up an impressive 258% during this period and outperformed the S&P 500 index's comparable gains of 81% by a huge margin.
TSMC's incredible rally could continue over the next five years as well. Let's take a closer look at why buying and holding this semiconductor stock for the next three years could be a smart move.
NYSE: TSM
Key Data Points
TSMC will benefit from stronger catalysts over the next five years
The global semiconductor market was worth an estimated $469 billion in 2018, according to the Semiconductor Industry Association. That number increased to $527 billion in 2023. So the semiconductor industry's revenue has increased at a compound annual growth rate (CAGR) of just 2.3% over the past five years.
The slow growth can be attributed to the weakness in the smartphone and personal computer (PC) markets over the past couple of years. However, the next five years appear bright for the semiconductor industry thanks to the emergence of a new catalyst in the form of artificial intelligence (AI), a technology that's set to drive an increase in chip spending across multiple industries.
Mordor Intelligence estimates that the semiconductor industry's revenue could increase at a CAGR of almost 11% through 2029, generating $1.2 trillion in annual revenue at the end of the forecast period. AI is already playing a central role in driving the accelerated growth in the semiconductor industry. For instance, the market for AI chips is forecast to grow at 38% a year in the coming decade as companies and governments are spending billions of dollars to train and deploy AI models.
On the other hand, sales of smartphones and PCs are also getting an AI-related boost. Market research firm Canalys estimates that sales of AI-capable PCs could jump from 48 million units this year to 205 million units in 2028. The market for generative AI smartphones, meanwhile, is forecast to grow at 28% a year through 2030.
The increase in sales of chips deployed in smartphones, PCs, data centers, and other applications bodes well for TSMC. That's because the Taiwan-based company is the world's largest semiconductor foundry with a market share of 62%, with the likes of Nvidia, Intel, Qualcomm, Advanced Micro Devices, and others using TSMC's facilities to manufacture their chips.
An improving market share could lead to healthy long-term gains
TSMC's impressive growth in recent quarters indicates that it is cornering a bigger share of the semiconductor foundry market. The company's revenue in the second quarter of 2024 increased 33% year over year to $20.8 billion. Analysts are expecting the company's revenue to increase almost 25% in 2024 to $86.4 billion.
For comparison, global semiconductor sales are forecast to increase 13% in 2024, which means that TSMC is on track to outgrow the semiconductor market this year. TSMC's share of the foundry market increased by 3 percentage points on a year-over-year basis in the first quarter of 2024, and it won't be surprising to see it gaining a bigger share of the market thanks to its robust growth.
With the semiconductor foundry market expected to be worth $236 billion in 2030, TSMC can sustain its solid growth over the next five years. Assuming it can maintain a 60% share of the foundry market in 2030, its annual revenue could hit $142 billion at the end of the decade. That would be double its 2023 revenue of $69.4 billion.
However, as the following chart indicates, analysts are expecting TSMC's revenue to hit $124.4 billion in 2026, suggesting that it could deliver stronger revenue growth over the next five years by gaining more share of the foundry market.
TSM Revenue Estimates for Current Fiscal Year data by YCharts
The 2026 revenue projection indicates that TSMC's revenue is on track to increase at an annual rate of 21% between 2023 and 2026 (using the 2023 revenue of $69.4 billion as the base). Assuming it can maintain even a 15% annual growth rate in the two years following 2026, its top line could jump to $164 billion in 2028.
So, TSMC's revenue could increase by 136% over the next five years (from 2023 levels). That would be faster than the 102% jump in the company's revenue from 2018 (when it reported sales of $34.2 billion) to 2023. The market could reward TSMC stock handsomely for this potential acceleration in its growth, which is why investors would do well to continue holding this semiconductor industry giant as it seems built for more upside over the next five years.
