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Artificial intelligence (AI) has made impressive progress to date, boosting growth for both pure-play companies and those simply associated with the technology. Taiwan Semiconductor Manufacturing (TSM) is not a direct AI company like Nvidia (NVDA) or Advanced Micro Devices (AMD), but it plays an important role in AI advancements. It manufactures advanced semiconductor chips for AI applications on behalf of tech giants like Nvidia, AMD, and Apple (AAPL). TSMC's cutting-edge semiconductor fabrication technology enables the development of AI processors for everything from data centers to self-driving cars.
TSMC's ability to mass-produce cutting-edge 5-nanometer and 3-nanometer nodes is critical for AI applications, as evidenced by its impressive growth. Furthermore, TSMC has made a major commitment to U.S. chip manufacturing, aligning with President Donald Trump’s vision. The company reported another strong quarter, as well as a strong finish to 2024.
Taiwan Semi stock is down nearly 12% in the year to date, while the S&P 500 Index ($SPX) is down 0.6%. Could now be a good time to buy it on a dip? Let’s find out.
TSMC Reports Another Strong Quarter
TSMC’s customer list consists of renowned AI companies, such as Nvidia, AMD, Apple, and Qualcomm (QCOM). In the fourth quarter, total revenue surged an impressive 37% year-over-year to $26.8 billion, driven by strong demand for 3-nm and 5-nm technologies. TSMC’s advanced technologies, such as 7-nm process nodes, accounted for 14% of total wafer revenue, with 5-nm nodes contributing the most (34%), and 3-nm nodes contributing another 26%. Diluted earnings per share increased by 57%, with a gross margin of 59%, owing to its leadership in high-end chip manufacturing. The company ended Q4 with cash and marketable securities totaling $74 billion.
While Taiwan remains its primary production hub, the company is making a significant investment in chip manufacturing in the U.S., thanks to $6.6 billion in CHIPS Act grants.
Trump announced on Monday, March 3 that TSMC plans to invest a staggering $100 billion to expand its chip manufacturing operations in the U.S. The investment will go toward the construction of five new fabrication facilities in Arizona, bringing the company’s total investment in the U.S. to $165 billion. Trump applauded the decision as a “tremendous move by the most powerful company in the world.” This expansion plan is consistent with the Trump administration’s overall strategy to position the U.S. as a global leader in AI and semiconductor production.
AI workloads require massive computational power, resulting in an increase in demand for AI chips in data centers. Companies such as Microsoft (MSFT), Google (GOOGL), and Amazon (AMZN) are increasing their AI infrastructure spending, which indirectly boosts TSMC’s revenue as its customers (Nvidia and AMD) sell more AI processors.
In the first quarter, management anticipates that smartphone seasonality will have an impact on revenue. However, a surge in AI-related demand could offset this. As a result, revenue could range from $25 billion to $25.8 billion, up from $18.8 billion the previous year.
TSMC Is Also an Income Stock
Aside from being a growth stock, TSMC is also an income stock that pays a substantial dividend. Its forward dividend yield of 1.61% exceeds the tech sector’s average of 1.4%. Furthermore, a low dividend payout ratio of 25.6% allows for dividend growth while the company also prioritizes funding growth initiatives.
Looking ahead, analysts covering TSMC stock expect revenue to rise 27.9% to $112.4 billion in 2025, followed by an 18.9% increase in 2026. Analysts expect earnings to increase by 29% and 17.4% over the next two years. At 19.7 times forward earnings, TSM is reasonably priced compared to its AI-related peers like Nvidia and AMD, making it an attractive investment now.
What Does Wall Street Say About TSM Stock?
Following the quarterly results, analysts’ consensus rating for TSM stock remains unchanged at “Strong Buy.” Of the 11 analysts who cover the stock, eight rate it a “Strong Buy,” two rate it a “Moderate Buy,” and one rates it a “Hold.”
Recently, Needham analyst Charles Shi reiterated his “Buy” rating, citing potential strategic benefits for TSMC if it takes over Intel’s (INTC) foundry operations. Recent rumors suggest that TSMC may have considered acquiring some or all of Intel’s chip plants, which have been struggling for some time. However, White House officials have stated that Trump’s administration “is unlikely to support a foreign firm operating Intel’s factories.”
The average analyst target price of $244.50 for TSM implies 40% upside above current levels. Furthermore, its Street-high estimate of $265 indicates the stock can rally as much as 54% over the next 12 months.
The Bottom Line on TSM Stock
The semiconductor industry is well known for its cycles of rapid growth and sharp declines. While AI demand is a significant growth driver, economic or geopolitical downturns, such as the ongoing escalation of tariffs, may have an impact on semiconductor sales. This makes TSMC a high-risk, high-reward investment. However, its technological leadership, strong financials, and key customer relationships position it as a long-term winner in AI-driven semiconductor growth, making it an attractive buy for now under $200.
On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
