TSM Stock Forecast: The Silent Partner

Milana PapadopoulouThis TSM Stock Forecast article was written by Milana Papadopoulou – Financial Analyst at I Know First.

Highlights:

  • TSM has the potential to reach $200 per share
  • TSMC is one of the most influential firms in the semiconductor space
  • TSM is trading at significantly lower multiples than its peers 

TSM: First “Pure-Play” Foundry

Source: Wikimedia Commons

TSMC, a Taiwanese semiconductor manufacturing and design company, is a global powerhouse. The firm is listed on the Taiwanese Stock Exchange, and its US ADRs are trading on the NYSE under TSM.  It is the world’s second most valuable semiconductor company and the largest independent semiconductor foundry. ITSMC is also Taiwan’s largest company, headquartered in Hsinchu Science Park in Hsinchu, Taiwan.

It was founded in 1987 and was the world’s first dedicated “pure play” foundry. At its founding, it was perceived as an overly ambitious project, bound to fail due to the prevalence of in-house chip manufacture. However, with increasing computing needs, widening applications of semiconductors and their increasing complexity affirmed the chosen business model. With high margins and growing revenues, TSMC has turned into an industry titan and does not seem to show signs of slowing down. TSM has soared this year, gaining 78% since January 2024.  

TSM: Business Segments

In 2023, TSMC served 528 customers and manufactured 11,895 products for various applications covering a variety of end markets, including high-performance computing, smartphones, the Internet of Things (IoT), automotive, and digital consumer electronics. The annual capacity of the manufacturing facilities managed by TSMC and its subsidiaries exceeded 16 million 12-inch equivalent wafers in 2023. TSMC is exclusively focused on manufacturing consumer products. It does not design, manufacture, or market semiconductors under its name. This way, it is never in direct competition with its consumers.

Its main sectors of operation are High-performance computing, smartphones, IoT, Automotive and digital consumer electronics. 

Competitive Pressure

Source: Pexels

When TSMC was founded, the concept of contract chip foundries was new. Over the years, new companies have emerged. Yet, in the present, the two biggest firms dominating the field are TSMC and Samsung. TSMC leads in market share, but Samsung is a close competitor, aiming to reduce the lead even further. TSMC holds a 60% market share (as of Q4 2023).

In contrast, Samsung is far behind in absolute market share (they only have 7.5%), and the Korean firm is rapidly expanding in the more advanced chip manufacturing. With the AI boom, it is precisely the advanced, smaller chips that deliver outsized returns. Moreover, Samsung has a significantly more diversified business model that can be more flexible.  

Samsung is also at the forefront of innovation and can manufacture advanced nodes and memory chips. The Korean giant has also started mass-producing 3nm semiconductors using its proprietary gate-all-around technology, which promises improved performance over the FinFET technology employed by TSMC. 

Leading with Innovation

Source: UCSD

In numerous interviews, TSMC’s CEO has said constant innovation is the key to staying ahead in their line of work. Aggressive R&D investments have yielded advancements in the type of microchips they can produce and the efficiency of the technologies they use for production. 

The most significant developments in proprietary technology have been the 3nm process technology, Chip on Wafer on Substrate (CoWoS), and Integrated Fan-Out. The former significantly improves power, performance and area over the previously available 5nm. The new 3nm nodes are expected to deliver 10-15% speed improvements and 25-30% power reduction.  The CoWoS and InFO technologies enhance chip performance and efficiency. They allow the creation of chips capable of more compute-intensive applications such as AI and data centre technologies. 

Major Contracts of TSMC

Source: Pickpic

TSMC has seven major clients with over half its revenue: Apple, NVIDIA, AMD, Qualcomm, MediaTek, Broadcom, and Intel. The first three accounts for 25% [Apple], 11% [NVIDIA], and 7% [AMD] of revenues in 2024. Apple’s share has been consistent over the last few years. NVIDIA and AMD, on the other hand, have significantly increased their demand in 2023 and Q1 2024. 

Apple and TSMC have an exclusive partnership as they are in direct competition with Samsung, so the higher implementation of Apple’s chips in new products will likely go entirely into TSMC’s pocket. 

Moreover, Samsung needs to improve in the 3nm node segment despite the latest R&D efforts suggesting that this predicament will be short. As a result, TSMC fully services the needs of customers in the smaller node segments (Apple makes its new smartphone A chips using 3nm nodes; Intel also outsources their needs for this type of chips to TSMC) 

Taiwan’s “Silicon Shield”

Source: Alan Wu

The stock market has been tremendously influenced by the AI and data center boom from 2023 onwards, making NVIDIA the most valuable company in the world. On the other hand, its primary contractor, TSMC, did not receive the same accolades. The Taiwanese company’s stock did grow significantly, but it is not trading at multiples close to the averages in the semiconductor-related space. This caution presented by investors has been due to geopolitical tensions in the region.

Until recently, all TSMC’s facilities for advanced chips were only in Taiwan. Thus, a potential for invasion deterred some investors in light of the turmoil in world politics. However, China greatly depends on Taiwan for its semiconductor needs and disturbing those supply chains would stagger technological progress. Investment analysts increasingly talk about the “silicon shield” around Taiwan, partly due to the prominence of TSMC’s chips in the market. Moreover, with new factories built in the US, Japan, and Europe, TSMC will likely be well-protected from political unrest, so it is a safe investment.  

Reaping the benefits of CHIPS

Source: NARA & DVIDS Public Archive

Following the US CHIPS Act of 2022, introduced by President Biden, TSMC started the construction of a fab on US soil. This is a move aimed at preventing the recurrence of the supply chain struggles in Covid times, where there was a global chip shortage. The mega factory is to be a copy of their Taiwan plant and is scheduled to be finished by 2024.

Even before the factory was completed, the company’s representatives announced that a second factory would be constructed in Arizona. The initial plan was to commence production by 2026, but that benchmark has moved forward to 2028. The delays are due to incentive review as they wanted to arrange the terms of investment with the US government. However, the parties seemingly agreed as TSMC announced that it should build a third factory and invest $65bn. That is one of the most significant foreign direct investments in US history. 

 Once up and running, the factories are bound to increase their production capacity significantly. This could serve as a vehicle for capturing a higher market share. On the other hand, with the firm continuously adjusting the construction timelines and struggling to recruit high-skilled staff, it is still being determined when the benefits will be reaped. 

Peers’ Performance

Source: Yahoo Finance.

Compared with similar firms AMD, NVIDIA, MU, and AVGO, TSMC trades at significantly lower EBITDA, Revenue multiples, and a lower forward P/E ratio. A valuation based on a mean P/E ratio of the peer set would indicate that the fair share value is upwards of $200. A lower valuation, of course, could be due to the shareholders anticipating subpar financial performance in the future. However, it is also likely that the stock has been overlooked for a time, with more attention being paid to chip manufacturers in this stage of AI investing. 

This notion is reflected in TSMC’s US ADR, which has grown significantly in the last year. Its growth within the previous three months is comparable to that of NVIDIA in the same period. As investors grow more aware of the supply chain involved in chip manufacturing and governments increase incentives for chip manufacturers, attention is likely to turn even more to TSMC.

Analyst view

Source: CNN Business

The analyst consensus on TSM is mainly bullish, with CNN and Investing.com rating it a buy and Yahoo Finance rating it a buy/hold. The increasing stock coverage has been one of the notions propelling TSM into the “Buy” category. 

TSM Forecast: Conclusion

TSM is a stock with significant potential for growth. Currently, at $179 per share, it will likely reach the $200 mark within the next 12 months. It shows healthy profit margins as well as solid relationships with its customers. Knowledgeable management and significant R&D investments have allowed the firm to assert a dominant position in the market and sizeable influence. Despite competition and geopolitical tensions, I am still convinced they can prosper, bringing consistent returns to investors. The stock is a “Buy” and valuable addition to a well-diversified portfolio. 

It is worth paying attention that the stock-picking AI of I Know First has a high signal on the one-year market trend forecasts, supporting my position for the TSM stock forecast. The light green for the short-term forecasts is mildly bullish, while the darker green is a strong bullish signal for the one-year forecast.

Past Success with TSM Stock Forecast

I Know First has been bullish on the TSM stock forecast in the past. On March 19th, 2024 the I Know First algorithm issued a forecast for TSM stock price and recommended TSM as one of the best dividend stocks to buy. The AI-driven TSM stock prediction was successful on a 3-month time horizon, resulting in more than 31.51%.

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Please note-for trading decisions use the most recent forecast.