Taiwan Semiconductor’s Impressive Clientele
Taiwan Semiconductor, also known as TSMC, is headquartered in Taiwan but has made significant investments in the U.S., notably its chip plant in Arizona. Although the facility faced initial challenges, it will eventually serve as an additional source for these essential chips.
Competing with top players like Samsung and Intel, Taiwan Semiconductor has managed to secure some of the most prominent clients in the industry, including Apple, Nvidia, and AMD. These companies prefer to rely on a neutral third party like Taiwan Semiconductor rather than direct competitors.
When it comes to technological advancements, both Samsung and TSMC have overshadowed Intel. Taiwan Semiconductor is gearing up its production capabilities for 3 nm (nanometer) chips and has plans to produce 2 nm products by 2025. Moreover, there have been rumors of developing 1.4 nm chips in the future.
In early 2022, Taiwan Semiconductor reached its peak market cap at around $730 billion. However, as chip demand decreased in 2022, the stock experienced a decline. This decline affected TSMC’s financials throughout 2023, but the company’s management believes that the chip supply glut is nearing its end.
This sets the stage for a potential recovery in 2024 and beyond, with Wall Street analysts projecting a 20% revenue growth for that year.
The stock’s recent decrease can be attributed, in part, to multiple contraction, which occurs when investors are not willing to pay as high a price for a stock as they normally would. Nevertheless, compared to its long-term average, Taiwan Semiconductor’s stock seems fairly priced. However, there is an argument that the current price does not fully reflect the company’s value.
Considering that the S&P 500 trades at about 26 times earnings, Taiwan Semiconductor’s stock appears to be trading at a 29% discount to the market.
It’s difficult to believe that Taiwan Semiconductor is a below-average business within the S&P 500. If the company achieves analysts’ projections for 2024 and trades at an earnings multiple of 22, its market cap could reach nearly $700 billion.
Furthermore, supposing TSMC can maintain a 12% earnings growth rate over the next five years (until the start of 2030), its value could reach $1.23 trillion. These estimates seem feasible and provide a compelling case for Taiwan Semiconductor to be valued at least $1 trillion by 2030, representing a compound annual growth rate of 14.9%. Such growth would outperform the long-term returns of the broader market.
Considering these factors, Taiwan Semiconductor appears to be an excellent investment opportunity over the next five to ten years.