Taiwan Semiconductor Manufacturing Company Ltd. TSM, the global leader in semiconductor foundry services and also known as TSMC, has delivered an astounding 80% rally in its stock price year-to-date. This surge has outpaced the broader market, with the S&P 500 and the Zacks Computer & Technology sector rising 23.4% and 25.7%, respectively.
YTD Price Return Performance
Image Source: Zacks Investment Research
Investors may question whether this rally leaves room for further upside or if the stock has reached its peak. However, Taiwan Semiconductor’s technological leadership, robust financials and strategic positioning in high-growth areas like artificial intelligence (AI) and high-performance computing (HPC) suggest it’s still a buy.
A Look at TSM’s Impressive Rally
Taiwan Semiconductor’s 80% YTD surge is underpinned by its impressive financial performance and technological leadership. In the first three quarters of 2024, TSMC consistently beat earnings estimates, driven by its pivotal role in powering the AI and HPC revolutions. Taiwan Semiconductor’s advanced process nodes, particularly 3nm and 5nm technologies, have been in high demand, contributing 20% and 32% of wafer revenues in the third quarter of 2024, respectively.
In the same quarter, TSMC delivered stellar financial results, with revenues climbing 36% year over year to $23.5 billion and net income surging 51% to $10.06 billion. Gross margins improved to 57.8%, a 350-basis point increase, showcasing Taiwan Semiconductor’s ability to scale profitably despite rising operational costs.
Such impressive metrics highlight the company’s unparalleled efficiency and critical role in supplying chips for AI applications, smartphones and data centers.
TSMC’s Fundamentals Remain Strong
Taiwan Semiconductor’s ability to innovate is unmatched. Its 3nm and 5nm process nodes dominate the market, powering chips for AI, cloud computing and next-gen smartphones. The company’s ongoing development of 2nm technology, expected to deliver up to 30% power savings, cements its leadership.
Moreover, with AI adoption accelerating across industries, demand for high-performance chips is surging. TSMC’s leadership in manufacturing AI-specific chips positions it as a major beneficiary of this trend. AI and HPC platforms now account for more than 51% of the company’s revenues, underscoring their critical importance. AI-related server processors are expected to triple in demand by the end of 2024, providing TSMC with a significant runway for growth.
While AI and HPC drive a substantial portion of revenues, TSMC also benefits from strong demand in automotive and IoT applications. Automotive chips contributed 5% of revenues in the third quarter of 2024, supported by trends like electric vehicle adoption and autonomous driving.
Smartphones, another key segment, accounted for 34% of revenues. With modest growth in global smartphone unit volumes expected in 2024, TSMC’s advanced chips remain essential to powering flagship devices from major manufacturers.
Taiwan Semiconductor's powerful customer base is another positive. Tech giants, including NVIDIA NVDA, Amazon Web Services, Broadcom AVGO, Intel INTC and Qualcomm, are among some of its biggest customers. In 2023, 70% of TSMC’s revenues came from just 10 major customers, and this growing relationship with industry leaders bodes well for future top-line growth. As companies continue to rely on TSM for their most advanced chips, these long-term partnerships ensure a stable and growing revenue base for the semiconductor giant.
Taiwan Semiconductor’s Promising Outlook
Taiwan Semiconductor’s outlook for the fourth quarter is incredibly optimistic. The company projects revenues between $26.1 billion and $26.9 billion, implying a 35% year-over-year increase at the midpoint. Its gross margins are expected to remain strong at 57% to 59%, supported by higher capacity utilization and continued demand for its 3nm and upcoming 2nm nodes. These advanced technologies ensure that TSMC remains at the forefront of semiconductor innovation.
Moreover, Taiwan Semiconductor continues to deliver robust cash flow, posting $37.62 billion in the first three quarters of 2024. With capital expenditures set to exceed $30 billion for the full year, TSM is strategically investing in future growth, ensuring it can meet the rising demand from AI, 5G and the automotive industry.
The Zacks Consensus Estimate for the current and next year depicts continued growth momentum for Taiwan Semiconductor.
Image Source: Zacks Investment Research
Despite its remarkable rally, Taiwan Semiconductor is not overvalued. The stock trades at a forward price-to-earnings (P/E) ratio of 21.85, below the sector average of 26.30. This reasonable valuation, coupled with the company’s growth potential, offers an appealing entry point for investors seeking exposure to the semiconductor sector.
Image Source: Zacks Investment Research
Conclusion: TSM Stock Remains a Buy
Taiwan Semiconductor’s 80% YTD rally is a testament to its dominance in the semiconductor industry. The company’s leadership in advanced manufacturing, strong financial performance and strategic positioning in AI and HPC ensure its relevance in a rapidly evolving market.
Despite its impressive run, TSMC’s valuation remains reasonable, making the stock a compelling buy. With a strong outlook for the fourth quarter, including projected revenue growth of 35%, the momentum is likely to continue. For investors seeking long-term growth in the booming semiconductor space, this Zacks Rank #1 (Strong Buy) semiconductor stock stands out as an opportunity worth seizing. You can see the complete list of today’s Zacks #1 Rank stocks here.
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