There is no stopping Taiwan Semiconductor Manufacturing (NYSE:TSM). The world’s largest pure play semiconductor foundry really has too much demand for its capacity and will be flush with growth for years to come. Despite the excess of good fortune showering down on Taiwan Semiconductor stock, shares are not overvalued.
TSM stock is undervalued, with a price-to-earnings ratio of 20 and a sales multiple of less than 2. With sales growing at 16.5% CAGR and earnings at 18% CAGR, this is a discounted stock. Wall Street predicts Taiwan Semiconductor to surpass earnings growth, with a 21% CAGR. The stock has already risen 46% in 2024, indicating further growth potential.
A Closer Look at Taiwan Semiconductor Stock
There is no getting around it; Taiwan Semiconductor stock is a behemoth. It supplies 95% of all advanced semiconductors on the market and is the primary supplier to Nvidia (NASDAQ:NVDA), Advanced Micro Devices (NASDAQ:AMD), Intel (NASDAQ:INTC) and Apple (NASDAQ:AAPL), as well as other voracious chip consumers.
There are concerns of an imminent slump in the industry after several years of gorging because of artificial intelligence. Chinese foundry Semiconductor Manufacturing International says it will be limiting its capacity expansion in 2025 and beyond as chip prices are expected to fall and customer pre-pull, according to DigiTimes Asia.
Taiwan Semiconductor doesn’t disagree. It recently implied a slowdown was coming to the industry. However, it says its own business won’t be disrupted.
The chipmaker forecasts sales to keep growing in the “low- to mid-20%” range because CEO C.C. Wei says AI demand is “insatiable.” AI will account for low-teen percentages of revenue.
There is also the expansion in the number of companies wanting to make their own chips. Apple, for example, recently said it wants to make computer chips for data centers that are designed to run AI software.
Microsoft (NASDAQ:MSFT) and Meta Platforms (NASDAQ:META) also want to build their own chips. But “build” is a misnomer. It will be TSM that actually makes most of the chips for their designs. So it will have no shortage of business regardless of what is happening elsewhere in the market.
Getting Paid to Expand
While chipmakers like Intel are big beneficiaries of the taxpayer dollars being doled out to massively profitable corporations through the U.S. CHIPS Act, Taiwan Semiconductor Manufacturing is also a big winner.
It is investing $65 billion in three new chip factories in Arizona. The first one is scheduled to begin producing 4 nanometer chips beginning in 2025.
A second facility will produce the world’s most advanced 2nm chips starting in 2028, and TSM will get a $25 billion handout from the federal government to build its third factory with production starting in 2030.
Not that there won’t be hiccups. The second plant, for example, is temporarily on hold due to rising costs as inflation keeps charging ahead.
TSM also discovered there is a lack of skilled labor in Arizona that is making it difficult to fill positions at the plant. That won’t get any easier if and when it builds its third factory.
Ascending to a $1 Trillion Valuation
Despite some challenges, Taiwan Semiconductor Manufacturing just keeps growing in size and importance. It also means TSM stock will likely cross the trillion-dollar valuation threshold soon.
The company is currently valued at $790 billion, and with its growth trajectory firmly established, it won’t be long before it joins that elite group of stocks worth $1 trillion or more. Now would be a good time to climb aboard this rocket ride.
On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
