On Oct. 8, 1997, Taiwan Semiconductor Manufacturing Company(NYSE: TSM) -- or TSMC, as it's often called -- became the first Taiwanese chipmaker to list its shares on the New York Stock Exchange. If you had invested $30,000 in its initial public offering at a split-adjusted price of $5.27 per American Depositary Receipt, your investment would be worth $1.17 million today.
TSMC consistently refined, upgraded, and shrank its manufacturing processes, and it outlasted many other chip foundries that abandoned the capital-intensive industry. From 1997 to 2022, TSMC shrank its chipmaking nodes from 300 nanometers (nm) to just 3 nm. It plans to start mass-producing its first 2 nm chips in 2025. Most of the world's top fabless chipmakers -- including Apple, Nvidia, Advanced Micro Device, MediaTek, and Qualcomm -- still rely on TSMC.
Image source: Getty Images.
TSMC is now the world's largest contract chipmaker. Only two other foundries -- Samsung and Intel -- remain in that "process race" to produce the world's smallest, densest, and most power-efficient chips. But Samsung can't match TSMC's transistor density, and Intel might drop out of the market by spinning off or selling its struggling foundry division.
TSMC still has a bright future, but can it turn a $30,000 investment into $1 million again over the next 30 years? Let's find out.
What happened over the past three decades?
From 1997 to 2023, TSMC's revenue and net income both rose at a compound annual growth rate (CAGR) of 16% in New Taiwan dollar (NTD) terms. During those 26 years, TSMC weathered two major global recessions, multiple boom and bust cycles in the semiconductor industry, and volatile relations between Taiwan, China, and the United States. Yet it continued to flourish as its closest industry peers shut down or stopped trying to produce smaller chips.
TSMC's main domestic competitor, UMC, stopped shrinking its chips at the 14 nm node. Globalfoundries, which was spun off from AMD in 2009, doesn't produce any chips beyond the 12 nm node.
As those rivals retreated, the market shrank, TSMC's pricing power increased, and economies of scale kicked in. With some financial assistance from Apple in 2011, TSMC installed ASML's expensive extreme ultraviolet (EUV) lithography systems -- which are required to manufacture chips beyond the 10 nm node -- before Samsung and Intel. Those upgrades helped TSMC overtake Intel in the process race with its leap to 7 nm chips in 2018.
What do we know about TSMC's near-term plans?
In its latest quarter, TSMC generated 51% of its revenue from the high-performance computing (HPC) market, 34% from the smartphone market, and the rest from the automotive, Internet of Things (IoT), and digital consumer electronics (DCE) markets. More than half of its revenue came from its top-tier 5 nm and 3 nm chips.
In 2023, TSMC's revenue fell 9% as it struggled with the PC market's slowdown, the end of the 5G upgrade cycle for smartphones, and macro headwinds in the enterprise hardware market. But for 2024, it expects its revenue to rise nearly 30% as the PC and smartphone markets stabilize and the artificial intelligence (AI) market expands.
The AI market's growth should light a fire under TSMC's HPC segment, which manufactures Nvidia's powerful data center GPUs for AI applications. It also produces AMD's Instinct data center GPUs, which cost significantly less than Nvidia's chips.
In 2025, TSMC plans to push its existing "low-NA" EUV systems to the limit with its 2 nm chips. Intel planned to launch its comparable 18A (1.8 nm) chips next year, but its initial production yields have been disappointing. Over the next two years, we should see whether or not Intel finally drops out of this intense race. If that happens, TSMC will monopolize the market for high-end chip production. But if Intel stages an eleventh-hour comeback, it could cause unexpected headaches for TSMC.
After TSMC launches its 2 nm chips, investors will need to see if it ramps up its spending on ASML's next-gen "high-NA" EUV systems to manufacture even smaller chips. That elevated spending could compress TSMC's margins as its growth cools off.
Last but not least, investors should keep an eye on the escalating tensions between Taiwan and China. TSMC has been building more overseas plants in the U.S., Europe, and Japan, but it still develops and manufactures its most advanced chips in Taiwan. Therefore, a military invasion or blockade could still severely disrupt TSMC's business.
What could happen over the next three decades?
From 2023 to 2026, analysts expect TSMC's revenue to grow at a CAGR of 25% as its earnings per share increase at a CAGR of 27%. Fortune Business Insights expects the global semiconductor market to expand at a CAGR of 15% from 2024 to 2032.
We should take those rosy estimates with a grain of salt, but they imply that TSMC could easily grow its EPS at a CAGR of 15% from 2023 to 2053. If that happens and it still trades at 23 times forward earnings, TSMC's stock could potentially soar nearly 38 times to about $7,700 per share. That rally would turn a $30,000 investment into $1.13 million.
Still, investors should see how its competitive and geopolitical risks play out instead of dreaming of those millionaire-making returns.
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Leo Sun has positions in ASML and Apple. The Motley Fool has positions in and recommends ASML, Advanced Micro Devices, Apple, Nvidia, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.
