How High Will Taiwan Semiconductor Go?

Nvidia, AMD, and Broadcom have all posted over 100% share price gains over the past year as artificial intelligence takes over from internet.

Taiwan Semiconductor Manufacturing Company (TSMC, NYSE:TSM) stock hasn’t quite soared to those heights, but TSM has increased by 61% over the past 12 months.

A large part of the rise has taken place in the initial months of 2024, with TSM up 37.5% year-to-date.

The company reported a strong quarter to close out 2023, beating revenue and earnings expectations. A substantial portion of TSMC’s top line comes from its partnership with Apple, who selected TSMC given its reputation for manufacturing the most advanced processor for the company’s iPhones.

But it was Taiwan Semiconductor’s prospects for 2024 that most excited investors. After revenue was flat from 2022 to 2023, TSMC believes that its chips will play a central part in the AI boom this year. There are detractors, though, who worry that AI stocks have risen too high too quickly, creating a bubble that’s likely to burst.

So how high can Taiwan Semiconductor stock go?

Revenues Starting To Rebound

Taiwan Semiconductor is the world’s largest contract chipmaker and, with a market capitalization of over $600 billion, it’s the most valuable company in Asia. The company reported zero revenue growth for 2023, however, on the back of slower smartphone sales and an embattled Chinese economy.

In the 4th quarter of 2023, TSMC reported $19.62 billion in revenue, which was essentially even year-over-year. It was 14.4% higher than the previous quarter, and that growth was attributed to increased demand for the company’s top-of-the-line 3-nanometer (3nm) chip.

TSMC’s 3nm chips are the semiconductors that power the current and next wave of Apple devices, and the iPhone maker accounts for around 23% of TSMC’s business. In Q4, 5-nanometer chips were still 35% of TSMC’s shipments while 3nm shipments accounted for 15%.

Even though revenue rebounded higher in the Q4, net income fell by 19.3%. Earnings were still 6% better than analysts expected, and net income was also 13.1% better than the prior quarter.

For the first quarter of 2024, TSMC expects revenue to drop slightly, forecasting guidance between $18 and $18.8 billion in sales. The lowered expectation is due to persistent economic headwinds in China and beyond.

Will Taiwan Semiconductor Stock Keep Going Up?

While TSMC logged a significant improvement from the previous quarter to close 2023, it’s not out of the woods. Investors who bought Taiwan Semiconductor shares this year are probably not that concerned about the company’s short-term stagnation. They, like TSMC’s leadership, believe that AI will have an impact sooner than later.

TSMC’s 3nm chips are already at the forefront of the industry, yet the company has continued to innovate. TSMC expects to have 2-nanometer (2nm) chips in production by late 2025.

A nanometer in chipmaking refers to the size of the transistors on the chips. The smaller the transistors, the more can fit on the chip, increasing the efficiency of the semiconductor.

TSMC’s main customer for 2nm chips will surely be Apple, and rumors have circulated that 2nm chips will power the iPhone 17. These semiconductors are also expected to be in high demand for AI operations. TSMC has already announced plans to launch a 1.4-nanometer chip by 2027.

The race for AI semiconductor market share is heated, and Samsung was just selected by Japanese company PFN in the first deal for AI 2nm chips. Taiwan Semiconductor has worked with PFN since 2016, so the deal was a disappointment for the company.

TSMC Analysts Ratings Are Bullish

Despite that setback, Wall Street still believes that TSMC is set up to succeed. Out of 40 analysts who have weighed in on TSM, 39 consider it a buy.

Even still, the stock’s recent rise has started to outpace the analysts. The average price target is $131.80, which is 2.66% lower than where TSM currently trades.

There are 9 analysts who believe TSM can outperform the market over the next year, with the highest projection forecasting that it will reach $160 per share, an 18.1% increase from where the stock currently trades.

No Sell ratings exist on TSM, but there’s a single Hold recommendation. The lowest forecast for the stock has it dropping to $100 per share, representing a 26.1% potential decline over the next 12 months.

Is Taiwan Semiconductor Stock Undervalued?

The low price target would seem to support the conclusion that TSM is becoming overvalued. But with a price-to-earnings (P/E) ratio of 26.4, the stock is well below the tech industry average P/E of 30. It’s also far below Nvidia’s 73.8 P/E. It’s lower than all of its major competitors as well, including Samsung with a P/E value of 33.9.

Those are indicators that the stock is undervalued at this price point, and TSM is trading 14.5% lower than its 52-week high of $158.40.

TSMC has been rewarding its shareholders with dividends for decades. The current quarterly payout is $0.49 per share, amounting to a 1.43% annual dividend yield.

Is Taiwan Semiconductor Stock a Buy or Sell?

Taiwan Semiconductor is a leading player in a semiconductor industry that has been red-hot over the past year or so. But it hasn’t captured the attention of AI investors like Nvidia or Microsoft has so far.

That could be fortunate for investors who believe they have missed the boat on the biggest AI stocks and are looking for other options. Because the majority of TSMC’s business comes from smartphones, the company is likely to still face short-term revenue struggles.

The stock is undervalued compared to its industry and competitors and it pays a solid dividend. As the focus continues to shift to AI, TSMC’s chips could be in heavy demand. That means patient TSMC investors could be in a position to reap substantial rewards.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.