The Taiwanese chipmaker has generated reliable gains for nearly three decades.
Taiwan Semiconductor (TSM -0.47%) became the first Taiwanese chipmaker to list its shares on the New York Stock Exchange on Oct. 8, 1997. It went public at a split-adjusted price of $5.27 per American depositary receipt, and a $1,000 investment in that IPO would be worth nearly $24,000 today.
During the 26 years and six months since its U.S. debut, TSMC grew into the world’s largest and most advanced contract chipmaker. It’s now impossible for the top fabless chipmakers — including Nvidia, AMD, Qualcomm, and Apple — to produce their smallest, densest, and most power-efficient chips without TSMC’s foundries. Let’s look back at TSMC’s history, how it outlasted its rivals, and where it might be headed.
Image source: Getty Images.
A brief history of TSMC
TSMC was launched as a government-backed chipmaking venture in 1987. Taiwan’s government recruited Morris Chang, who had previously spent 25 years at Texas Instruments, to lead the project.
From 1987 to 2022, TSMC shrank its chipmaking nodes from 3 microns (3000 nanometers) to 3 nanometers. It became increasingly difficult and expensive to manufacture those smaller chips, and many other chipmakers simply gave up.
AMD spun off its own foundry division, GlobalFoundries, and became a fabless chipmaker in 2009. TSMC’s domestic rival, UMC, also stopped developing smaller chips beyond the 14nm node in 2018, while Intel struggled with delays and shortages while transitioning from 14nm to 10nm chips.
Today, only three major foundries — TSMC, Samsung, and Intel — can manufacture the world’s smallest and densest chips. TSMC remains one to two chip generations ahead of Samsung and Intel in this tight “process race.”
TSMC pulled ahead of Samsung and Intel by adopting ASML‘s extreme ultraviolet (EUV) lithography systems — which optically etch the smallest circuit patterns onto silicon wafers — before both companies. TSMC was initially reluctant to buy those expensive systems, which cost about $200 million each, but Apple funded its first EUV system purchases in 2014 to support the production of its own first-party chips.
How fast has TSMC been growing?
From 1997 to 2023, TSMC’s annual revenue and net income both grew at a compound annual growth rate (CAGR) of 16% in Taiwanese dollar terms. It continued growing even as the global semiconductor market endured several cyclical downturns.
TSMC’s most recent cyclical slowdown occurred in 2023, when its revenue and earnings per share dropped 4.5% and 17.5%, respectively. Those declines were caused by two major challenges: sluggish shipments of PCs in a post-pandemic market and the end of the 5G upgrade cycle in smartphones. Those headwinds offset the stronger growth of the AI market.
What’s next for TSMC?
But in 2024, TSMC expects “low to mid-20%” revenue growth as the expansion of the AI market easily offsets the tepid growth of its PC and smartphone markets. During its latest conference call, CEO C.C. Wei predicted the company’s revenue from server AI processors would “more than double this year” and account for a “low-teens” percentage of its full-year revenue. Wei also predicted the AI processor market would grow at a 50% CAGR over the next five years, account for over a fifth of its top line by 2028, and become the “largest contributor” to its overall revenue growth.
From 2023 to 2026, analysts expect TSMC’s revenue and earnings per share to both grow at a CAGR of 20% in TWD terms. Its stock still looks reasonably valued relative to those growth rates at 19 times forward earnings, and it should remain a well-balanced way to profit from the secular expansion of the semiconductor market without betting on a single chipmaker.
Investors should still pay attention to Intel’s latest attempts to catch up to TSMC and its exposure to the geopolitical tensions between the U.S., China, and Taiwan. That said, I believe TSMC will remain a top chip stock to buy for the foreseeable future.
Leo Sun has positions in ASML and Apple. The Motley Fool has positions in and recommends ASML, Advanced Micro Devices, Apple, Nvidia, Qualcomm, Taiwan Semiconductor Manufacturing, and Texas Instruments. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel and short May 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.
