HomeBusinessWhere will Taiwan's semiconductor manufacturing supply be in three years?

Where will Taiwan’s semiconductor manufacturing supply be in three years?

Taiwanese semiconductor manufacturing (NYSE: TSM) shares have already delivered impressive gains of 30% through 2024, outpacing growth S&P500‘s 10% jump by a wide margin. The good news for investors is that the company, popularly known as TSMC, appears capable of maintaining its robust stock market for the next three years.

Let’s take a look at why that’s likely the case and why investors would do well to buy TSMC stock before jumping higher.

The semiconductor industry is poised for stronger growth

The demand for semiconductors will increase significantly faster in the coming years than in the past. The semiconductor industry generated $469 billion in revenue in 2018, a figure that would rise to $527 billion by 2023, representing a compound annual growth rate (CAGR) of 2.4%. Fortune Business Insights estimates that the global semiconductor market could generate annual revenues of $1.38 trillion by 2029. That would translate into a CAGR of 17%.

This sharp acceleration in the semiconductor market’s future revenues can be attributed to one key catalyst: artificial intelligence (AI). The AI ​​chip market alone is forecast to generate $156 billion in revenue by 2029, up from just under $15 billion last year, and reach a CAGR of 40%. This is great news for TSMC, as the company’s expertise in advanced chip manufacturing puts it well-positioned to take advantage of this lucrative opportunity.

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Fantastic chip makers like Nvidia, Advanced micro devices, Qualcomm, Marvell Technology, and others who design chips usually outsource their production to a foundry like TSMC. Considering that these companies are currently in a race to produce powerful and efficient AI chips, demand for TSMC chips made using advanced process nodes has increased.

For example, in the fourth quarter of 2023, chips manufactured using 7-nanometer, 5nm and 3nm process nodes accounted for 67% of TSMC’s quarterly revenue of $19.6 billion. That’s a big improvement from the year-ago period, when TSMC got 54% of its $19.9 billion in revenue from sales of 7nm and 5nm chips. In the fourth quarter of 2022, the company sold no 3nm chips, but just a year later this process node accounted for 15% of its revenue.

So on a year-over-year basis, TSMC’s revenue from advanced process nodes, which are 7nm or smaller, increased from $10.7 billion in the fourth quarter of 2023 to $13.1 billion. That is a 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 produce the next generation of Blackwell AI graphics processing units (GPUs) on a 3nm node. Chip designers prefer a smaller manufacturing node for making high-performance chips because the transistors on these advanced chips are tightly packed together.

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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 able to deliver higher computing power while consuming less energy. Not surprisingly, adoption of TSMC’s most advanced 3nm process will increase this year, and this process node could generate more than 20% of the company’s revenue.

Furthermore, 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 could generate huge revenues from this node. All this explains why TSMC’s revenue is expected to grow at a healthy rate in 2024 and for years to come, which could ultimately translate into solid share price appreciation.

Here’s a look at 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.

TSM revenue estimates for the current fiscal year

TSM revenue estimates for the current fiscal year

This year’s revenue forecast points to a 20% increase over 2023 revenue of $69.3 billion. By 2026, TSMC is expected to reach $110.5 billion in revenue, although it could achieve a higher number given that it has focused on aggressively expanding its manufacturing capacity. But even if the company reaches $110.5 billion in sales by 2026 and trades at 8.2 times sales at that point (equivalent to the five-year average price-to-sales ratio), its market capitalization could rise to something in three years more than $900 billion. .

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Based on TSMC’s current market cap of $705 billion, this semiconductor stock could deliver a gain of 27% over the next three years. However, the possibility of a bigger upside cannot be ruled out as the market could reward TSMC with a higher sales multiple than its current price-to-earnings ratio of 10. That’s because AI stock tends to have a premium valuation and TSMC’s current price-to-earnings ratio is lower is. than many prominent names benefiting from the spread of this technology.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool holds positions in 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 supply be in three years? was originally published by The Motley Fool

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