Taiwan Semiconductor Manufacturing (TSM +1.04%) is one of the most important players in the global semiconductor industry, as it fabricates chips for many of the top fabless chipmakers and consumer electronics giants.
The Taiwan-based powerhouse holds a dominant 67% share of the global third-party foundry market; second-place Samsung (which also produces its own chips in-house) has just 11% of the third-party foundry space. Moreover, TSMC's foundry market share has risen steadily from 58% a couple of years ago to where it is now. Looking ahead, the growing demand for artificial intelligence (AI) chips could provide tremendous upside for TSMC, sending its market cap well above its current level of just over $1 trillion.
Indeed, I believe TSMC could triple its market cap in the next five years.
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AI chips could ensure years of solid growth for TSMC
TSMC's advanced processing nodes are being used by numerous companies, including Nvidia, Broadcom, Marvell, AMD, and Apple, to fabricate AI-capable chips that go into data centers, personal computers, and smartphones. This puts TSMC firmly at the center of the trend of growing adoption of AI across multiple end markets.
NYSE: TSM
Key Data Points
According to one estimate, the global AI chip market could clock annualized growth of 35% through 2033 as the technology filters through to more applications. TSMC itself is forecasting that its revenue from selling AI accelerators designed by the likes of Nvidia, AMD, Broadcom, and Marvell could register a compound annual growth rate in the mid-40% range over the next five years.
Throw in the proliferation of AI in other technologies such as smartphones, PCs, vehicles, and the Internet of Things (IoT), and it becomes obvious that this chipmaker is on track for terrific and sustained growth. For instance, according to a forecast by research firm Market.Us, shipments of generative AI smartphones and PCs are expected to grow at a compound annual rate of 35% through 2029, and the deployment of AI in the automotive industry is expected to grow at a similar rate.
Not surprisingly, TSMC is investing aggressively to upgrade its chip manufacturing and packaging capacity to make the most of the rising AI-driven demand in the semiconductor market. It is on track to invest a total of $165 billion in the U.S. alone to build advanced chip fabrication facilities, packaging plants, and a research and development center.
In all, TSMC is going to build 24 new factories across the world. These capacity investments should also allow it to maintain its dominant stature in the foundry market.
Why the stock has the potential to triple
TSMC management pointed out last year that its total addressable market (TAM) under the Foundry 2.0 definition stood at $247.5 billion. It points out that Foundry 2.0 also includes packaging, testing and assembly, and other ancillary markets apart from chip manufacturing.
Market research firm IDC estimates that the Foundry 2.0 market will clock 11% growth in 2025 -- nearly double its growth rate last year -- and reach $298 billion in revenue this year. TSMC's share of this market is expected to grow to 37% in 2025 -- a big jump over the 28% share it was sitting on a year ago.
Looking ahead, IDC expects the Foundry 2.0 market to clock a 10% compound annual growth rate through 2029. That would bring the Foundry 2.0 market's annual revenue to $436 billion at the end of that period. TSMC could go on to capture a bigger share of this market in the next five years because of its aggressive capacity expansion, as well as the technological advantages it enjoys over rival foundries, which allow it to produce faster and more power-efficient chips for its customers.
If we assume that TSMC could increase its Foundry 2.0 share to 60% after five years (which doesn't seem difficult considering the pace at which its market share is increasing), its annual revenue could hit $262 billion. That would be almost three times its 2024 revenue. The stock is trading at almost 11 times sales right now.
If it's trading at a slightly higher sales multiple in five years, it would crack the $3 trillion market cap. And the market could easily decide to reward TSMC with a premium valuation considering that its sales look likely to increase at a faster pace over the next five years than they did over the previous five.
