Global Fab Expansion And AI Demand Will Strengthen Future Outlook

Key Takeaways

• Global expansion and advanced technology investments are set to enhance TSMC's production capabilities and solidify technology leadership.
  
• Rising AI demand and strategic focus on high-margin services are expected to drive significant revenue growth.
  
• TSMC's overseas expansion and rising costs may pressure margins and earnings, with revenue volatility risks linked to AI demand and macroeconomic uncertainties.

Catalysts

Manufactures, packages, tests, and sells integrated circuits and other semiconductor devices in Taiwan, China, Europe, the Middle East, Africa, Japan, the United States, and internationally.

• TSMC's investment in expanding its global manufacturing footprint, particularly with new fabs in Arizona, Japan, and Germany, is anticipated to enhance production capabilities and address growing customer demand, potentially boosting future revenue streams.
  
• The ramp-up and continued development of advanced technologies, such as 2-nanometer and A16 nodes, alongside the existing 3-nanometer and 5-nanometer processes, are expected to solidify TSMC's technology leadership and support revenue growth.
  
• The projected growth in AI demand, particularly from AI accelerators, with expectations of doubling revenue in 2025, is set to drive significant revenue increases, aligning with the industry’s megatrends.
  
• TSMC's strategic focus on advanced packaging solutions, such as CoWoS and SoIC, is expected to cater to rising demand from AI and HPC applications, potentially increasing revenue contribution from these higher-margin services.
  
• The anticipated increase in capital expenditures to USD 38-42 billion in 2025, primarily focused on advanced process technologies, signals TSMC's commitment to capturing future growth opportunities, implying a positive outlook for future earnings.

Taiwan Semiconductor Manufacturing Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Taiwan Semiconductor Manufacturing's revenue will grow by 21.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 40.5% today to 41.6% in 3 years time.
• Analysts expect earnings to reach NT$2161.8 billion (and earnings per share of NT$84.05) by about January 2028, up from NT$1173.3 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as NT$2419.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.3x on those 2028 earnings, down from 25.1x today. This future PE is lower than the current PE for the US Semiconductor industry at 28.8x.
• Analysts expect the number of shares outstanding to decline by 0.27% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.38%, as per the Simply Wall St company report.

Taiwan Semiconductor Manufacturing Future Earnings Per Share Growth

Risks

• TSMC's gross margin is anticipated to be diluted by 2% to 3% every year for the next five years due to the ramp-up of overseas fabs, impacting overall profitability.
  
• Rising electricity costs in Taiwan and inflationary pressures are expected to reduce gross margin by at least 1% in 2025, affecting net margins.
  
• The expansion of overseas fabs, such as those in the U.S. and Japan, comes with increased costs due to smaller scale operations, higher supply chain prices, and early-stage ecosystem development, which may pressure earnings.
  
• A reliance on significant AI-related demand growth presents a risk; if the high expectations are not met, particularly due to potential supply chain constraints like HBM shortages, it could lead to volatility in revenue.
  
• The global semiconductor industry faces macroeconomic uncertainties that could impact consumer demand across traditional markets such as smartphones and PC, potentially affecting TSMC revenue streams.

Valuation

• The analysts have a consensus price target of NT$1442.94 for Taiwan Semiconductor Manufacturing based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NT$1800.0, and the most bearish reporting a price target of just NT$1215.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NT$5193.8 billion, earnings will come to NT$2161.8 billion, and it would be trading on a PE ratio of 21.3x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of NT$1135.0, the analyst's price target of NT$1442.94 is 21.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.