Taiwan Semiconductor Manufacturing Co., Ltd. (Taiwan SemiconductorNYSE:TSMSemiconductor giant TSMC, better known as TSMC, has had a strong year amid growing interest in AI. TSM shares have risen 69% in the last year, making it one of the biggest stocks in the benchmark iShares Semiconductor ETF.Nasdaq:SOXX) is up 45.7% in the same period. Despite its big gains over the past few quarters, TSMC appears poised for further gains.
The company has a significant advantage in the industry in terms of market share and partnerships with leading AI companies, giving it the flexibility to raise prices to match the market. It is also in the process of significantly expanding its manufacturing facilities. Finally, its highly anticipated 2-nanometer technology is expected to be industry-leading.
These are some of the factors that have Wall Street analysts making bullish predictions about TSMC: I agree with these optimistic assessments and believe there is still room for growth after last year’s big gains.
Foundry market share leader and strong growth
TSMC has emerged as a strong leader as companies rush to meet their AI needs with increasingly powerful hardware. As the world’s largest semiconductor foundry, it boasts a 60% market share in the foundry business and is ahead of Samsung.OTC:SSNF) 13%, Intel (Nasdaq:INTC) accounted for 2%.
TSMC’s dominance in the AI ​​hardware market may help offset the recent decline in its other major business segment, smartphones, which accounted for 38% of revenue in the first quarter of 2024 but have been hurt in recent quarters by a slowdown in the global smartphone market.
The good news is that AI revenue could double this year, TSMC executives said in a recent earnings call, and the company also expects AI-related revenue to grow at a 50% compound annual growth rate over the next five years and eventually account for one-fifth of the company’s total revenue.
Customer Relationships and Pricing Possibilities
TSMC has a unique structure in that it does not design, manufacture or sell semiconductor products under its own brands, so it does not compete with its customers. This allows TSMC to compete with major chip makers such as Nvidia (NASDAQ:NVDA) currently accounts for about 10% of TSMC’s revenue.
The partnership is likely to grow as Nvidia steadily releases new versions of its AI chips and CEO Jensen Huang has expressed a willingness to raise TSMC’s prices. And with Nvidia willing to buy more expensive TSMC components, others in the AI ​​chip industry are likely to follow suit.
Manufacturing Expansion and Technology Leadership
In response to demand for its products, TSMC has been rapidly expanding its manufacturing capabilities by opening new facilities around the world. It opened its first semiconductor fab in Japan earlier this year and received $10.3 billion in government funding at the end of June to open its second fab in Japan and a new facility in Arizona. TSMC also expects to receive billions of dollars in grant funding from the U.S. government under the CHIPS and SCIENCE Act to further expand its manufacturing capacity in Arizona.
Key to TSMC’s Arizona operations in the coming quarters will be the fact that the company plans to build out its upcoming 2-nanometer (N2) product line, which is expected to be the most advanced semiconductor technology upon release and is expected to begin mass production by the second half of 2025.
Strong margins and guidance
Looking at all of the above factors, plus TSMC’s strong margin expectations and revenue guidance, it’s easy to see why analysts rate this stock as having future growth potential. TSMC has a smart plan to optimize costs, even taking into account the increased fees associated with overseas manufacturing. The company will leverage pricing flexibility, government partnerships, and other tools to target gross margins of 53% or higher.
In its first-quarter earnings report, TSMC issued an optimistic outlook for the second quarter, projecting revenue of $19.6 billion to $20.4 billion, a median increase of 27.6% compared to the same period last year. The company also has a track record of beating guidance over the past few quarters.
Is Taiwan Semiconductor Stock a Buy, According to Analysts?
After rising over the last year, TSM shares are currently trading at $175.70. The average price target for TSM is $182.56, which gives it room for upside of 3.9%. The company currently has a “Strong Buy” rating based on 10 Buys, 0 Holds, and 0 Sells.
Conclusion: Market leadership and huge potential
Few companies are better positioned than TSMC to benefit from the expected rapid growth in AI technology and demand. The company’s dominance in the AI ​​component market is unmatched, and its excellent customer relationships give it flexibility to adjust pricing and other factors to optimize costs. The company has received support from multiple governments to establish new foundry capabilities, and its upcoming N2 technology is expected to lead the industry.
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