This stock could be a winner over the long term due to its central role in the increasing adoption of fast-growing technologies such as artificial intelligence.
Nvidia has proven to be a standout investment over the past decade. The company’s stock price rose a whopping 32,600% during this period, outpacing the S&P 500 index’s 207% gain.
That means an investment made in Nvidia stock 10 years ago for just $3,500 would be worth just over $1 million today.
NVDA data by YCharts.
So NVIDIA has turned out to be a billionaire manufacturer’s stock over the past decade, assuming someone back then put $3,500 into the stock and didn’t sell it. But as the graph above shows, most of Nvidia’s gains came in the past two years, when the artificial intelligence (AI) craze swept the world.
Nvidia has been at the forefront of the AI revolution thanks to its graphics processing units (GPUs). GPUs are useful for training AI models and are now being introduced for AI inference. The good news is that NVIDIA can continue to grow at a healthy pace in the future thanks to the lucrative opportunities that exist in the AI chip market, where it is currently the dominant player.
But at the same time, investors looking to buy Nvidia stock now would have to pay a hefty price tag of 65 times earnings and 36 times sales. While Nvidia may justify its valuation with its impressive growth, investors looking for an alternative company trading at relatively cheap levels may want to take a closer look at Taiwan Semiconductor Manufacturing. Probably. (TSM 2.78%)commonly known as TSMC.
The Taiwan-based foundry giant plays a key role in the global semiconductor market and could be an ideal choice for investors looking to build a multi-million dollar portfolio. Let’s see why.
TSMC is one of the best ways to fuel the AI boom
TSMC is the world’s largest semiconductor foundry. Its manufacturing facilities are used to manufacture chips by top chip manufacturers such as Nvidia, AMD, Broadcom, and Qualcomm. Additionally, consumer electronics giant Apple is TSMC’s biggest customer, and Sony and others rely on Taiwanese companies for chip manufacturing.
Notably, TSMC will have an impressive base of 528 customers at the end of 2023, with 12,000 customers serving multi-end markets such as smartphones, Internet of Things (IoT), high-performance computing, consumer electronics, and automotive. They are manufacturing similar products. With AI driving solid growth in all of these end markets, it’s no wonder why TSMC has been growing at an incredible pace lately.
The company announced its 2024 third-quarter financial results on October 17, reporting that sales increased 36% year over year to $23.5 billion. This exceeded the high end of the company’s guidance of $23.2 billion. Even better, TSMC’s net income rose 54% year over year to $10.1 billion, easily beating consensus estimates. The company’s strong revenue growth can be attributed to a 4.2 percentage point increase in net profit margin.
TSMC’s impressive growth has been driven by growing demand for the company’s advanced chip nodes, which are 7 nanometers (nm) or smaller in size. More specifically, advanced process nodes generated 69% of total revenue, compared to 59% in the prior year period. It’s worth noting here that TSMC’s 3nm node accounted for 20% of sales, compared to just 6% in the same period last year.
This can be attributed to the arrival of Apple’s latest generation of iPhones, which are equipped with 3nm processors made by TSMC. Adoption of the company’s 3nm process node should further increase as next-generation AI chips from Nvidia, AMD, and Intel are expected to be manufactured using this platform in the future.
Additionally, TSMC is currently developing 2nm technology, expected to go into production next year, pushing the boundaries even further. So it’s no surprise that TSMC will have additional advanced nodes to sell to customers, and the 2nm process will be another solid growth driver for the company.
That’s because chips manufactured using smaller process nodes pack more transistors into a smaller surface area and have higher computational power and thermal efficiency. As a result, customers use TSMC’s advanced process nodes to produce chips that can deliver superior performance while keeping power consumption low.
With a market share of approximately 62% in the global semiconductor foundry sector, well ahead of second-place Samsung’s 11%, TSMC is well positioned to take advantage of the long-term growth of the semiconductor market in the long term. be. That’s exactly why the guidance for this quarter is also good.
TSMC expects fourth-quarter sales of $26.5 billion, at the midpoint of its guidance range, and operating margin of 47.5%. Its top-line forecast points to a potential increase of 35%, but given that TSMC’s operating margin was 41.6% in the year-ago period, the bottom line should also increase at a considerable rate. .
But investors looking to build a million-dollar portfolio would be wise to also keep an eye on the company’s long-term growth potential.
Why TSMC looks good for million dollar portfolios
The global semiconductor market is expected to generate revenue of $1.47 trillion in 2030, up from $729 billion in 2022. Not surprisingly, the global semiconductor foundry market is expected to surge from $122 billion last year to $276 billion in 2033. We know that TSMC is a dominant player in this space, but more importantly, the company has recently significantly expanded its addressable market by diversifying beyond the foundry space.
Under the new Foundry 2.0 business model, TSMC has expanded into additional markets including “packaging, testing, mass production, etc.” The company notes that the new model has already expanded its addressable market from $115 billion to $250 billion. Therefore, there is a good chance that TSMC will maintain its impressive growth rate for a long time to come.
Analysts expect the company to finish 2024 with sales of $89.3 billion, an increase of 28% from a year ago. The following graph shows that TSMC can maintain its impressive growth in the coming years.
TSM earnings forecast data for current year by YCharts.
However, this chart also shows that analysts are raising their revenue estimates for TSMC, a trend that could continue due to the company’s expanding addressable market and long-term growth in the foundry space over the next decade. There is sex. That’s why investors would be wise to buy this semiconductor stock now. That’s because this semiconductor stock trades at an attractive trailing P/E of 35x and forward P/E of 25x, making it significantly cheaper than Nvidia.
Another thing to note is that TSMC stock has soared more than nine times over the past decade. Based on the points above, we may come close to replicating such performance in the future. So anyone looking to build a $1 million portfolio should consider buying before prices skyrocket.
