Semiconductor Demand will likely persist from the likes of AI, IoT, and 5G

Catalysts

1. AI Chip Boom: TSMC’s quarterly revenue surged at its fastest pace in over a year, thanks to the global boom in AI development. The demand for high-end chips and servers, particularly those used in AI applications, has been a major driver of TSMC’s sales growth. The company is a key chipmaker for tech giants like Nvidia and Apple.
2. Solid Growth Expectations: Despite the post-Covid decline in smartphone and computer sales, TSMC’s revenue for the March quarter exceeded expectations, with a 16% rise compared to the previous year. The company is budgeting substantial capital expenditure and expects revenue to grow by at least 20% in 2024, reversing the slight decline observed in 2023.
3. AI Revenue: TSMC’s AI revenue is growing at an impressive rate of 50% annually. The company is actively building plants in the US, Japan, and Germany to fabricate advanced AI chips used in data centers operated by internet giants like Amazon and Microsoft.
4. Market Recovery: Signs of a broader market recovery are emerging. Rival Samsung Electronics Co. also reported a sharp profit rebound in its semiconductor division during the first quarter, indicating positive industry trends.

Assumptions

TSMC’s Revenue in 10 Years:

1. Continued Semiconductor Demand: The global appetite for semiconductors is unlikely to wane. As technology infiltrates every aspect of our lives, demand for chips will persist. TSMC, being a major player, will benefit from this trend.
2. AI, IoT, and 5G: These transformative technologies will drive demand for advanced chips. TSMC’s expertise in manufacturing cutting-edge nodes (like 3nm and beyond) positions it well. Revenue from AI accelerators, IoT devices, and 5G infrastructure will contribute significantly.
3. Automotive Electronics: Electric vehicles (EVs) and autonomous driving systems rely heavily on semiconductors. TSMC’s collaboration with automotive manufacturers will yield substantial revenue.
4. Diversification: TSMC will expand beyond consumer electronics. Think medical devices, smart cities, and renewable energy. Revenue streams diversify, reducing dependence on specific sectors.
5. Geopolitical Considerations: Tensions between nations may impact supply chains. TSMC’s ability to navigate these challenges will influence its revenue trajectory.

TSMC’s Earnings in 10 Years:

1. Margins: TSMC’s gross margins are likely to remain healthy due to its technological edge. As it transitions to more advanced nodes, economies of scale will improve profitability.
2. Investments in R&D: TSMC’s commitment to research and development will pay off. New process nodes, materials, and packaging techniques will enhance efficiency and yield.
3. Competition: Rivals won’t sit idle. Intel, Samsung, and others will innovate. TSMC must stay ahead to maintain robust earnings.
4. Cost Management: Efficient operations and cost control will impact net earnings. Balancing capital expenditure with profitability is crucial.
5. Market Share: TSMC’s market share will influence earnings. If it continues to dominate, profits will follow suit.

Risks

1. Sustainability of AI Chip Demand: While the current demand for AI chips is strong, some investors remain cautious about its long-term sustainability. The industry needs to balance growth with realistic expectations.
2. Geopolitical Uncertainty: TSMC operates in a region with geopolitical tensions, particularly concerning the Taiwan Strait and tensions with China. The uncertainty in this area could impact the company’s operations.
3. Apple’s Sales Challenges: Apple, TSMC’s most important customer, faces difficulties in growing iPhone sales, especially in China where Huawei is gaining ground in the high-end market.

Valuation

3 Years:

1. Revenue Growth: TSMC will continue to ride the semiconductor wave. Revenue will likely expand due to robust demand for AI chips, 5G infrastructure, and automotive electronics. The company’s strategic investments and technological prowess will pay off.
2. Profit Margins: Gross margins should remain healthy, driven by advanced process nodes and efficient operations. However, increased competition might exert some pressure.
3. Valuation Multiple: Investors will still view TSMC favorably, but geopolitical risks and market dynamics will influence valuation. A forward P/E ratio of around 25–30 seems plausible.

5 Years:

1. Revenue Diversification: TSMC will diversify further. Beyond consumer electronics, it’ll play a pivotal role in smart cities, healthcare devices, and renewable energy. Revenue streams will be more balanced.
2. Technological Leadership: TSMC will maintain its technological edge. It’ll be at the forefront of 2nm or even 1.5nm nodes. This innovation will drive revenue growth.
3. Profit Margins: As economies of scale kick in, gross margins may improve. However, R&D costs will rise. Net margins will remain healthy but not astronomical.
4. Valuation Multiple: Investors will still consider TSMC a blue-chip stock. A forward P/E ratio of 25–30 could be reasonable.

10 Years:

1. Global Dominance: TSMC will be a global powerhouse. Its chips will power everything from AI-driven robots to smart clothing. Revenue will dwarf today’s figures.
2. Profit Margins: TSMC’s operational efficiency will be finely tuned. Gross margins will stabilize, but net margins might face pressure from increased competition.
3. Valuation Multiple: TSMC will be a core holding for long-term investors. A forward P/E ratio of 20–25 could reflect its mature yet resilient status.