Future Projection of Taiwan Semiconductor Manufacturing Stock in 3 Years

Future Projection of Taiwan Semiconductor Manufacturing Stock in 3 Years

Semiconductor manufacturing in Taiwan (NYSE:TSM) stocks have already made impressive gains of 30% in 2024, surpassing the S&P500That’s a 10% jump by a wide margin. The good news for investors is that the company, known as TSMC, also appears capable of maintaining its strong stock momentum over the next three years.

Let’s look at why this is likely to be the case and why investors would do well to buy TSMC Stock before jumping higher.

Semiconductor Industry Poised for Stronger Growth

Demand for semiconductors is expected to grow at a significantly faster rate in the coming years than in the past. The semiconductor industry generated $469 billion in revenue in 2018, a figure that climbs to $527 billion in 2023, equating to a compound annual growth rate (CAGR) of 2.4%. Fortune Business Insights estimates that the global semiconductor market could generate an annual revenue of $1.38 trillion in 2029. This would translate to a CAGR of 17%.

This sharp acceleration in semiconductor market revenues can be attributed to a key enabler: artificial intelligence (AI). The AI ​​chip market alone is expected to generate $156 billion in revenue in 2029, up from just under $15 billion last year, a growth of 40%. This is great news for TSMC, as the company’s expertise in advanced chip manufacturing puts it in a good position to capitalize on this lucrative opportunity.

Fabless chipmakers such as Nvidia, Advanced microsystems, Qualcomm, Wonderful Technology, and others who design chips typically outsource their production to a foundry like TSMC. Since these companies are currently in a race to produce powerful and efficient AI chips, demand for TSMC chips manufactured using advanced process nodes has increased.

For example, in the fourth quarter of 2023, chips made using 7-nanometer, 5nm, and 3nm process nodes accounted for 67% of TSMC’s quarterly revenue, or $19.6 billion. This is a big improvement from last year, when TSMC made 54% of its $19.9 billion in revenue from the sale of 7nm and 5nm chips. It wasn’t selling 3nm chips in Q4 2022, but just a year later this process node accounted for 15% of its revenue.

So, on an annual basis, TSMC’s revenue from advanced process nodes, which are 7nm or smaller, increased to $13.1 billion, up from $10.7 billion in the fourth quarter of 2023. This represents an nice increase of 22%.

Popular AI chips such as Nvidia’s H100 and AMD’s MI300X are manufactured using the 5nm process node, and Nvidia is expected to manufacture the next-generation Blackwell AI graphics processing units (GPUs) on a 3 node. nm. Chip designers prefer a smaller fab node to make powerful chips because the transistors in these advanced chips are tightly packed together.

As a result, electrons move faster between these transistors and generate less heat because they have to travel a smaller distance. In other words, these advanced chips are capable of delivering higher computing power while consuming less power. Unsurprisingly, adoption of TSMC’s most advanced 3nm process is expected to increase this year, and this process node could produce more than 20% of the company’s revenue.

Additionally, TSMC predicts that the 3nm node could help its customers create end products worth more than $1.5 trillion over the next five years, indicating that the foundry giant itself- even could generate massive revenue from this node. All of this explains why TSMC’s sales are expected to grow at a healthy pace in 2024 and the next two years, which could eventually translate into a sharp rise in the stock price.

Here’s how much upside TSMC stock could deliver over the next three years

As the following chart indicates, analysts have significantly increased their revenue growth expectations for TSMC.

Future Projection of Taiwan Semiconductor Manufacturing Stock in 3 Years

Table of TSM revenue estimates for the current fiscal year

Revenue forecasts for the current year indicate a 20% increase from the $69.3 billion in revenue achieved in 2023. In 2026, TSMC is expected to reach $110.5 billion in revenue. business, although it could reach a higher figure given that it has focused on aggressively expanding its manufacturing capacity. But even if it has sales of $110.5 billion in 2026 and trades at 8.2 times sales at that point (the equivalent of its five-year average price-to-sales ratio ), its market capitalization could rise to just over $900 billion in three years. .

Based on TSMC’s current market cap of $705 billion, this semiconductor stock could generate gains of 27% over the next three years. However, the possibility of a larger upside cannot be ruled out given that the market could reward TSMC with a higher sales multiple than its current P/S of 10. Indeed, AI stocks generally have a higher valuation premium and TSMC’s current P/S ratio is inferior to many prominent names capitalizing on the proliferation of this technology.

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Hard Chauhan has no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Advanced Micro Devices, Nvidia, Qualcomm and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Marvell technology. The Motley Fool has a disclosure policy.

Where will Taiwan’s semiconductor manufacturing inventory be in 3 years? was originally published by The Motley Fool

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