Some concerns have arisen in recent months that the fuel behind the AI fire is starting to wane. The flagship AI stock, NVIDIA, gained 156% through the first six months of the year, but Nvidia shares only gained 18.8% since the midpoint of 2024. While that is still substantial growth, it reflects investors’ concerns about AI’s ability to generate substantial revenue.
Though Taiwan Semiconductor Manufacturing Company, better known as TSMC (NYSE: TSM), might not get as much attention as its American tech counterparts, the semiconductor maker is one of the most important companies in the AI industry.
TSMC makes the chips that power the newest generations of Apple’s iPhones, and it also makes semiconductors for NVIDIA. The company’s role in supporting the mass adoption of AI has driven TSM up by 85.7% year-to-date.
Tailwinds might also keep those gains going. For example, Taiwan Semiconductor has beaten revenue and earnings expectations for the past two quarters, but exactly how high could it go?
Key Points
- TSMC’s Q3 revenue surged 36% year-over-year, driven by demand for AI chips.
- Analysts expect a 25.7% stock price increase, with strong growth likely continuing.
- Despite a P/E of 30.5, TSMC is undervalued compared to peers, offers a 1.23% dividend yield, and is rated a Buy by most analysts.
Why Did Taiwan Semiconductor Stock Rise?
TSMC share price leaped by almost 10% after its last earnings report when management reported revenues of $23.5 billion in the third quarter, which was up 36% year-over-year. It was also marginally, just 1.26%, better than what analysts had forecast.
The top brass reported net income of $10.1 billion, a 54% pop over last year’s equivalent quarter. Diluted earnings per share of $1.94 represented a 5.3% improvement versus analysts forecasts. The earnings growth was driven by an increase in gross margin, up from 54.3% last year to 57.8% in Q3.
TSMC’s revenue growth has been tethered to high demand for chips that power AI applications, and management forecasted that growth will persist into next quarter.
“Our business in the third quarter was supported by strong smartphone and AI-related demand for our industry-leading 3nm and 5nm technologies,” said Wendell Huang, Senior VP and Chief Financial Officer of TSMC. “Moving into fourth quarter 2024, we expect our business to continue to be supported by strong demand for our leading-edge process technologies.”
Why Growing Fast In the Semi World Is Just So Hard
In the semiconductor industry, a nanometer refers to the size of the transistors on the chips. The smaller the transistors are, the more of them can be fit on the chip, increasing the semiconductor’s potency.
TSMC’s 3nm chips are the semiconductors that power the current and next wave of Apple devices, but the advanced chips only accounted for 20% of total chip revenue in Q3. The less advanced 5nm chips are still the company’s top seller.
Though the company is currently the largest producer of advanced chips in the world, TSMC has continued to push the envelope. The company has said it is still on track to launch mass production of its 2nm chips in 2025. The 2nm chips are touted to be 10%-15% faster than the 3nm model, and should consume less power.
While the company has made impressive strides over the past few quarters, TSMC’s growth may well be jeopardized by an uncertain political environment. Both the U.S. and China have expressed concerns about keeping powerful AI technology within their borders.
Taiwan recently told TSMC that it could not manufacture its 2nm chip overseas following concerns about the policies the newly-elected Trump administration would enact against Asian companies. A Taiwanese economy minister said that TSMC might make its 2nm abroad in the future, but that the company’s “core technology will stay in Taiwan.”
That mandate comes after TSMC recently announced a $65 billion investment to build three manufacturing plants in Arizona. Adding to the company’s geopolitical woes, the U.S. Department of Commerce ordered TSMC to halt shipments of its advanced chips to China, after a TSMC chip was found in a device made by a Chinese company that is under U.S. sanctions.
How High Could TSMC Stock Go?
The highest forecast has TSMC shares leaping by 37.9% to $260 per share over the next 12 months. The average price target is $236.99, which would be a 25.7% increase from where the stock currently trades.
While there are a definite political concerns for Taiwan Semiconductor in the near future, Wall Street analysts are still largely bullish on TSM. Out of 47 analysts who have rated the stock, 45 believe that TSM is a Buy, and 12 rate it as an Outperform.
No Sell ratings exist on TSM, but there are two Hold ratings. The lowest estimate forecasts TSM stock will gain a modest 6.1% to $200 per share over the coming year.
Is TSMC Stock Undervalued?
While all of the analysts believe TSM is undervalued, the stock’s 30.5 price-to-earnings ratio doesn’t make it appear cheap. However, that value is comfortably below the Nasdaq 100’s 46.7 P/E ratio, and far below Nvidia’s 68.9 P/E.
In addition, TSMC has been rewarding its investors with dividends for decades. The stock currently has an annual dividend yield of 1.23% which equates to a quarterly payout of $0.58 per share.
The Bottom Line
TSMC’s leadership said at the earnings call that the demand for AI is legitimate, and that the company has benefited from the “deepest and widest growth of anyone in this industry.” Taiwan Semiconductor makes the chips that power devices that are integral to the operations of the biggest tech brands, and the company has continued to innovate.
However, there are real concerns that Taiwan Semiconductor is caught in the middle of political tensions that will impact its business. While TSMC will continue to face pressure from China, it’s worth noting that only about 11% of TSMC’s Q3 revenue came from China.
Given the strong revenue growth TSMC has been able to achieve, it’s likely that TSM will still have room to rise in the coming year.