Can the world’s leading semiconductor foundry help make investors richer in the long run?
Buying and holding solid companies for a long, long time is a tried-and-tested method of making money in the stock market, as this strategy allows investors to not only capitalize on secular growth trends but also benefit from the power of compounding.
For instance, an investment of $10,000 made in shares of Nvidia 10 years ago is now worth more than $2.7 million. The market has rewarded Nvidia stock handsomely over the years thanks to its ability to capitalize on multiple secular growth trends such as video gaming, high-performance computing, connected cars, and now artificial intelligence (AI).
Of course, not every stock could deliver Nvidia-like gains and turn $10,000 into more than a million dollars over a decade. However, investors looking to construct a million-dollar portfolio would do well to buy shares of Taiwan Semiconductor Manufacturing (TSM 1.51%). Let’s look at the reasons why buying this name as a part of a diversified portfolio could help investors become millionaires in the long run.
The semiconductor market’s secular growth is set to give TSMC a big lift
The global semiconductor industry is expected to clock sales of $1.47 trillion in 2030. That would be a nice jump when compared to the industry’s sales of $439 billion in 2020, indicating that the semiconductor market is poised to clock a compound annual growth rate (CAGR) of almost 13% during this 10-year period.
For comparison, global semiconductor sales were $298 billion in 2010, which means that the industry grew at a CAGR of just 4% between 2010 and 2020. So, the global semiconductor industry is forecast to grow at a much stronger pace through the end of the decade thanks to new catalysts such as AI, which will power growth in multiple end markets such as data centers, computers, and smartphones.
Buying TSMC stock is one of the best ways to play this secular growth opportunity. That’s because the world’s leading chipmakers and electronics manufacturers use TSMC’s production facilities to manufacture their chips. More specifically, TSMC is the world’s largest semiconductor foundry, commanding a market share of close to 62%. Its dominance in this space can be understood from the fact that the second-placed foundry, Samsung, has a share of just 11%.
Allied Market Research estimates that the global semiconductor foundry market could reach $231 billion in revenue in 2032 as compared to $107 billion in 2022. Assuming TSMC manages to hold on to a 60% share of this market at that time, its top line could grow to $139 billion. However, as the following chart indicates, TSMC is unlikely to take so long to hit that mark.
TSM Revenue Estimates for Current Fiscal Year data by YCharts
One reason analysts are expecting TSMC’s top line to grow by healthy double-digit rates is because of its focus on winning a bigger share of the foundry market. Management recently approved a $30 billion capital expenditure plan. TSMC plans to use this money to upgrade its existing facilities for manufacturing advanced chips, as well as for constructing new fabs to “meet long-term capacity plans based on market demand forecasts.”
A key reason TSMC is set to invest such a huge sum in infrastructure is that it has been unable to keep up with the demand for advanced chips. For example, TSMC customer Nvidia pointed out earlier this year that its popular chips such as the H200 and the upcoming Blackwell AI processors are supply constrained.
The demand for TSMC’s advanced 3-nanometer (nm) chips is reportedly so strong that its order book is full through 2026. Moreover, the Taiwan-based giant is expected to raise prices for its 3nm chips by around 5%. At the same time, it is expected to hike the price of its advanced chip packaging by 20% to 30% in 2025.
More importantly, major TSMC customers such as Nvidia have reportedly agreed to the price hikes. That’s not surprising given how solid TSMC’s share of the foundry market is, enabling it to enjoy solid pricing power in this space.
TSMC’s growth could turn out to be better than expected
Analysts are expecting TSMC to deliver 27% revenue growth in 2024 to $88 billion. However, its revenue in the first seven months of the year has increased at a faster pace of 30.5%. Its revenue for July increased at an even faster pace of 44.5%. Not surprisingly, TSMC’s revenue growth estimates have been heading higher of late, as we saw in the above chart.
That trend could continue thanks to TSMC’s efforts to increase its market share through capacity investments, which bodes well for the company’s future given the long-term opportunity present in the semiconductor industry. In all, TSMC should be able to sustain its healthy levels of growth for a long time to come and could become an integral part of a million-dollar portfolio.
Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.