Although a company’s past performance does not guarantee future results, history is one of the few rational things that can be used to guide predictions. It can be a very good indicator of what’s to come, especially for cyclical companies. Things are looking very promising for Taiwanese semiconductor manufacturing. (TSM -0.70%) Because the setting is similar to the scenario seen in 2020.
The last time Taiwan Semi adopted a structure similar to its current one, its stock price doubled the following year. So could that performance be repeated in 2025?
There is a tailwind for profits
Taiwan Semiconductor is the world’s largest third-party chip manufacturer. It outsources its chip manufacturing capabilities to customers such as Nvidia. (NASDAQ:NVDA) and apple (NASDAQ:AAPL)This means that a significant portion of the world’s most powerful devices contain chips made in TSMC’s foundries.
Taiwan Semi also has the ability to manufacture chips using the 3nm process node, which is currently the most advanced process available. Node size is used to refer to the minimum distance in nanometers between certain features on a chip. Although this is not the case now, the continued reduction in node size represents a significant increase in the density and processing power of the chips being produced.
Although the 3nm node packs a lot of processing power, Taiwan Semi is already working on the 2nm process and plans to start using it to manufacture chips for customers in late 2025. All of this is reminiscent of what the company looked like when it entered the market. 2020.
At the time, Taiwan Semiconductor had just launched a 5nm chip, an improvement over its previous best-in-class 7nm chip. Additionally, when the world shut down due to COVID-19, a huge wave of chip demand was about to hit TSMC (though TSMC didn’t know it). As a result, many people needed to upgrade their computers and other digital devices so they could work more efficiently. Study remotely or use video chat services to stay in touch with people outside your home.
Going into 2025, there will be a huge demand for AI chips, and TSMC plans to roll out 2nm chips later this year. Going back to Q3 2023, management forecasts that AI chip sales will grow at an average annual rate of 50% over the next five years, and that AI chips will account for a portion of sales by the end of that period. I expected it to be deaf. teens.
But its growth has so far been even faster than management expected. AI revenue is expected to triple in 2024, accounting for mid-teens of revenue. Management indicated that it shows no signs of slowing growth heading into 2025, so the types of long-term trends that prevailed in 2020 should be evident in 2025 as well.
Evaluation level is the same as in the 2020s
Some might point out that the stock nearly doubled in 2024, but that could be partly because the stock was undervalued heading into this year. TSMC’s price-to-earnings ratio at the beginning of 2024 was approximately 19 times. For comparison, supermarket chain operator Kroger is a low-margin, low-growth company that trades at a P/E ratio of 18. They should not have set the same price for these vastly different businesses.
Investors who recognized this and acted accordingly made significant profits as the stock’s valuation rose toward where it should have been over the course of the year. However, TSMC is currently trading at slightly above its valuation level at the beginning of 2020.
TSM PE ratio data by YCharts.
Current stock prices are a little higher since the start of 2020, but they’re still close enough to make a reasonable comparison. After the initial market decline as COVID-19 reached pandemic status, TSMC stock quickly recovered and nearly doubled during the year. This was driven by strong revenue growth that continued through 2022. However, prior to that period, sales in 2018 and 2019 were weak.
TSM Operating Revenue (Quarterly YoY Growth) data from YCharts.
The Formosan cicada experienced impressive growth from 2020 to mid-2022, but today’s situation is similar to the beginning of that period. The current trend started in mid-2024, but the first part of the stock price rally was to bring stocks back to normal valuation levels. Investors are now focused on how to sustain growth. That is likely to be resolved, as large-scale AI-related demand is still on the horizon.
Will Taiwan Semiconductor’s stock price double next year? I don’t really understand. But today’s situation seems similar to when the company accomplished that feat in the past. Even if it doesn’t double, I think TSMC is a great investment and will likely outperform the market in 2025.
Keithen Drury has held positions at Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Apple, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
