Is Taiwan Semiconductor Stock a Buy Now?

Among the world’s largest semiconductor makers, Taiwan Semiconductor Manufacturing (TSM -1.72%) — popularly known as TSMC — stands second only to Nvidia. While artificial intelligence (AI) darling Nvidia outsources the manufacturing of its chip designs, TSMC is the one doing the building.

Nvidia is far from the only one. TSMC’s other customers include several tech titans, such as Advanced Micro Devices and Apple. With the explosion in customer demand for semiconductor chips to power artificial intelligence, TSMC’s business is booming.

This also means the chip manufacturer’s shares have soared. Last October, TSMC stock was at a 52-week low of $84.95 before beginning a steady climb. After reporting third-quarter results on Oct. 17, the stock hit an all-time high of $212.60.

Does this mean the opportunity to buy has passed? Or is there more upside for TSMC shares? Let’s find out.

TSMC’s technological advantage

TSMC holds an enviable position amid the demand for leading-edge logic chips, used in advanced computing technologies such as AI and 5G mobile networks. TSMC is the world leader in manufacturing these specialized semiconductor chips, with an estimated 90% share of this market.

A key factor in TSMC’s market dominance is customer demand for chips using its three-nanometer (nm) semiconductor manufacturing process. Referred to as 3nm, this technology creates chips with greater microprocessor speed, lower energy consumption, and exceptional computational power without increasing chip size.

This 3nm tech looks like a game-changer for TSMC. The process produces better chips than its older 7nm technology, which was once responsible for over a third of the company’s revenue a mere three years ago. Just last year, TSMC’s 3nm-related revenue was a tiny 6% of Q3 sales. But the rapid rise of AI drove 3nm income to reach 20% of Q3 revenue this year.

As 3nm-manufactured chips become more widely adopted, TSMC’s market share in this sector is expected to grow. This is because TSMC’s 3nm process generates higher yields and power efficiencies compared to those made by such competitors as Samsung.

TSMC’s 3nm strengths position the firm for revenue growth in the coming years. The market for the technology is forecast to skyrocket from $1.4 billion in 2023 to $26.5 billion by 2032.

TSMC’s financial performance

With its 3nm process taking off, TSMC experienced strong sales in the third quarter as revenue rose 36% year over year to $23.5 billion. CFO Wendell Huang noted: “Our business in the third quarter was supported by strong smartphone and AI-related demand.”

Along with rising revenue, Q3 gross margin increased to 58% from 54% in the prior year, indicating TSMC’s business is managing costs more efficiently compared to last year. As a result, its profits surged 54% to $10.1 billion.

The company expects robust revenue growth to continue into its fourth quarter. TSMC management anticipates Q4 revenue of at least $26.1 billion, up from the prior year’s $19.6 billion.

TSMC’s long-term sales potential looks to get a boost from the expansion of its chip fabrication facilities. Because leading-edge logic chips are needed for advanced computing, the U.S. government is incentivizing TSMC to build semiconductor factories in the United States.

The U.S. currently does not manufacture leading-edge logic chips. To change that, it provided TSMC with up to a $6.6 billion government award as part of the CHIPS Act.

To buy or not to buy TSMC stock

Leading-edge logic chips are so important to the evolution of computing that some industry experts suggest these chips rival the economic significance of oil. If so, even though TSMC shares hover near an all-time high, the firm could still be a valuable investment opportunity.

A look at TSMC’s price-to-earnings (P/E) ratio, a widely used metric for assessing stock valuation, tells you how much investors are willing to pay for a dollar’s worth of earnings. While TSMC’s P/E multiple has increased, it’s still not at the elevated levels seen in the past.

Data by YCharts.

This suggests that its share price is not unreasonably high although you could wait for a dip before grabbing the stock. Wall Street believes shares can go higher. The consensus among Wall Street analysts is a “buy” rating with a median price target of $235.89 for TSMC stock.

AI is perhaps the biggest technology shift since the advent of the internet. TSMC’s leadership position in leading-edge logic chip production makes it a critical player in the AI ecosystem, and in turn, its stock is a no-brainer investment for the long term.

Robert Izquierdo has positions in Advanced Micro Devices, Apple, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.