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Artificial intelligence (AI) is fueling a significant increase in data center manufacturing due to its specialized computational demands that require extensive processing power, memory, and storage. As AI technology advances, the need for data centers that are highly efficient, scalable, and equipped to manage increasingly complex AI workloads will continue to grow.
This surge has in turn driven increasing demand for semiconductor companies that cater to data centers, prompting investors to focus on high-quality semiconductor stocks. Among these is Taiwan Semiconductor Manufacturing (TSM), the largest and most advanced pure-play semiconductor foundry in the world.
TSMC plays a crucial role in the global semiconductor supply chain, manufacturing chips for major tech companies like Apple (AAPL), Nvidia (NVDA), and Advanced Micro Devices (AMD). Its capability to mass-produce cutting-edge, 5-nanometer (nm) and 3-nm nodes has solidified its position as an indispensable partner for these industry leaders.
Last year, TSMC’s stock surged by 94.5%, significantly outpacing the S&P 500 Index’s ($SPX) 24% gain. With data center manufacturing accelerating this year, TSMC expects to report another strong quarter on Jan. 16. Let’s find out if TSM stock is a good buy before its fourth-quarter earnings release tomorrow.
AI Is Boosting TSMC’s Financials
TSMC’s revenue has almost tripled over the past decade, reflecting its dominance in advanced chip manufacturing. Compared to $24.1 billion in 2014, revenue has increased to $70.6 billion in 2023. Analysts predict revenue will cross $100 billion by 2025.
The company reported another strong quarter with total revenue up 36% year-over-year to $23.5 billion in Q3. TSMC’s advanced technologies, such as the 7-nm process nodes, contributed to 69% of total revenue, while the 5-nm and 3-nm nodes accounted for 32% and 20% of total revenue, respectively. Diluted earnings per share increased by 54.2% in Q3, with a gross margin of 57.8% driven by cost improvement efforts. The company ended the quarter with a hefty cash balance totaling $69 billion.
The company invests heavily in manufacturing facilities and research and development (R&D). Furthermore, the $6.6 billion in grants it received through the CHIPS Act will support its global expansion efforts. This includes plans to construct a three-factory complex in Arizona, aiming to reintroduce advanced semiconductor manufacturing to U.S. soil. TSMC’s headquarters in Taiwan expose it to geopolitical tensions between China and the U.S. Through its international expansion, the company is working on mitigating some of these risks. Additionally, TSMC is the preferred foundry for leading tech companies like Apple and Nvidia. As AI drives growth for these industry leaders, the demand for TSMC's products is expected to increase steadily.
The icing on the cake is TSMC is also a dividend stock. With a dividend yield of around 1.38%, almost in line with the tech sector average yield of 1.37%, TSMC provides a balanced investment opportunity, combining growth and income.
TSMC Is Set to End 2024 on a Strong Note
During its Q3 earnings call, management said that it believed smartphone and AI-related demand for its advanced technologies would continue in the fourth quarter, leading to revenue growth of 33% to 37%, to range between $26.1 billion and $26.9 billion. Gross margin could land between 57% and 59%. The company expects full-year capital expenditure to increase by over $30 billion as it continues investing in advanced technologies. Taiwan surpassed consensus estimates in the third quarter. Analysts forecast revenue of $25.9 billion and earnings per share of $2.23 in the fourth quarter.
Analysts expect Taiwan’s revenue to increase by 27.5% to $87.3 billion in 2024, followed by a 26.3% increase to $110.9 billion in 2025. Plus, earnings could increase by 35.7% in 2024, followed by another 28.7% in 2025. TSMC stock’s valuation is hovering around 22.2x forward 2025 earnings, making it a reasonably valued AI stock to buy now given its growth prospects and leadership position.
The global demand for AI and high-performance computing is expected to grow by 15% in 2025. TSMC commands over 64% of the global semiconductor foundry market as of 2024, far surpassing competitors like Samsung Foundry and SMIC. According to industry experts, TSMC is expected to continue to dominate this space with market share increasing to 66% in 2025. There is a growing demand for advanced nodes, and TSMC’s dominance in advanced nodes is unparalleled at the moment.
What Do Analysts Say About TSM Stock?
On Jan. 8, Brad Lin, an analyst at Bank of America Securities, maintained a "Buy" rating for TSM stock and set a price target of $250. Lin highlighted the growth potential for TSMC fueled by increasing demand in the AI and high-performance computing sectors and noted that the stock is attractively priced. He also suggested that potential government incentives could serve as a growth catalyst in the years ahead. More recently, Simon Coles, an analyst at Barclays, also reaffirmed a "Buy" rating for TSM stock, assigning a price target of $240.
Overall, Taiwan stock is a “Strong Buy” on Wall Street. Out of the 10 analysts covering the stock, seven have a “Strong Buy” recommendation, two analysts rate it a “Moderate Buy,” and one rates it a “Hold.” The average analyst target price of $228.28 for TSM implies 12.5% upside above current levels. Furthermore, its Street-high estimate of $265 indicates the stock can rally as much as 30.6% over the next 12 months.
Is TSM Stock a Buy Now?
TSMC stock offers a good combination of growth, stability, and income at an attractive valuation for investors with a high risk appetite and a long-term investment horizon. Its technological leadership, strong financials, and strategic expansion plans position it for more growth in the coming years as AI evolves. The stock is down 9.3% from its 52-week high. It might be a good time to grab this exceptional AI stock.
