I don’t think it’s unreasonable to think that semiconductors are as important to the world economy as food, air, and water. Semiconductors are the backbone of modern computing, and nearly every device we use relies on them. This includes smartphones, laptops, routers, and various home appliances. Just like our daily lives, businesses in almost every industry around the world rely on semiconductors. Without the largest semiconductor foundry, Taiwan Semiconductor Manufacturing Company (TSM), the world economy would come to a screeching halt.
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The company’s stock rose 85% in 2024, making it one of Wall Street’s biggest winners this year. However, after the latest financial results, I believe TSMC has more room to run. As we will see, the ongoing revolution in artificial intelligence is driving demand for semiconductors to new heights. This bodes well for TSMC, so I initiate coverage with a ‘buy’ rating.
TSMC easily exceeded expectations in Q3
The first factor supporting my Buy rating is TSMC’s Q3 results shared on October 17th. The company’s revenue soared to $23.5 billion in the quarter, up 39% from the same period. More specifically, it beat analyst consensus by $500 million. TSMC Chief Financial Officer Wendell Huang said the strong sales growth was due to growing demand for 3nm and 5nm technologies (such as smartphones and AI). Additionally, the company’s diluted EPS increased 54.2% year-over-year to $1.94 per ADR unit, beating the analyst consensus of $1.77 for the quarter. Due to margin expansion, diluted EPS growth exceeded revenue growth in the quarter.
TSMC’s growth is still in its early stages
It’s hard to imagine, but for a nearly trillion dollar company, I’m bullish on TSMC. Because TSMC is a truly dignified company. According to Tipranks writer Oliver Lojanko, TSMC has about a 90% share of the global advanced chip market. This level of market power is very impressive and suggests that the company enjoys a wide competitive moat. This means that TSMC is likely to at least maintain its market share, if not further increase its market share in the future.
Another promising piece of the puzzle is that TSM operates in an industry that will continue to experience tremendous growth. According to Statista forecasts, global semiconductor industry sales are expected to grow 10.1% annually from $607.4 billion in 2024 to nearly $1 trillion by 2029. Double-digit annual growth is expected as TSMC continues to increase production capacity to meet growing customer demand in the coming years. Revenue growth should continue. That’s why, in addition to further margin expansion, the analyst consensus is for diluted EPS to rise 29.7% to $9.08 in 2025. Diluted EPS is expected to increase another 19.7% to $10.87 in 2026.
TSMC’s dividend may continue to rise
TSMC’s dividend and stable balance sheet provide two additional arguments for my Buy rating. The company’s dividend yield of 0.9% is in line with the technology sector’s average yield of 1%. Additionally, dividends are expected to grow at double-digit annual rates for the foreseeable future. This is because TSMC’s dividend payout ratio in 2025 is expected to be in the high 20% range. This leaves the company with sufficient capital to invest in research and development and capital projects to fuel future growth.
In terms of balance sheet, TSMC is in a great position. As of September 30, 2024, the Company’s net cash and securities position was approximately $33 billion. This allowed TSMC to benefit from the high interest rate environment, generating $1.7 billion in net interest income in the first nine months of 2024. Finally, this solid financial health supports the company’s AA credit rating from S&P Global (SPGI). Stable outlook.
TSMC stock may have more upside ahead
While this may seem contradictory for a stock that nearly doubled in 2024, TSMC’s valuation is reasonable enough to support my Buy rating argument. This is because the company’s forward P/E ratio is 20.9x, which is lower than the average P/E ratio over the past five years of 23.1x. My 12-month forward fair value is about $210 per share, which is about a 10% discount to fair value from current levels. Note that this fair value also doesn’t take into account that TSMC is likely to consistently beat analyst expectations in recent years. This could potentially increase my fair value a bit more.
Is TSMC a buy, according to analysts?
Turning to Wall Street, analysts have a consensus rating of TSMC as a Strong Buy. All five analysts covering the stock have rated it a “buy” in the past three months. The average 12-month price target of $205.00 represents a potential upside of 9.63% from the current stock price.
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conclusion
I believe TSMC stands out as one of the best ways to be a part of the ongoing AI revolution. The company has an unparalleled reputation in one of the highest growth industries in the global economy. TSMC’s dividend appears to be on a growth runway going forward, and the balance sheet gives the company more stability. While not as cheap as it was earlier this year, a strong case can be made that TSMC still has double-digit upside potential in the short term, along with solid medium-term return potential. Therefore, I am assigning a Buy rating to TSMC.
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