Keithen Drury, The Motley Fool
4 min read
In This Article:
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Taiwan Semiconductor is already a $1.1 trillion company.
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Management projects strong growth over the next five years.
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Taiwan Semiconductor Manufacturing (NYSE: TSM) is currently a $1.14 trillion stock. So, for it to reach $2 trillion by 2030, it would need to rise by 75% over the next five years, delivering an 11% compound annual growth rate (CAGR).
If you throw in Taiwan Semiconductor's 1% dividend yield, that means the stock would deliver about 12% returns over the next five years should TSMC (for short) rise to become a $2 trillion company.
That's market-beating growth, which is exactly what many investors seek. So, is this a realistic time frame? I think it is, but there are also signs that this would be a relatively slow growth rate compared to what management is projecting.
TSMC is the world's top contract chip manufacturer. That means it doesn't sell its chips on the open market; instead, it provides its chip production services to those that cannot make chips themselves -- which is nearly every big tech company.
TSMC is the key supplier for Apple and Nvidia, along with countless other recognizable names. It has become the top partner due to its best-in-class technologies and excellent chip yields, which keep prices low compared to its competitors.
As a result of all this, management has an excellent vision into the future since chip orders are often placed years in advance. This is especially true in the U.S., where its Arizona factory already sold out its capacity through 2027.
Management believes that over the next five years, AI-related revenue will have a 45% CAGR. That's incredible growth when sustained for a relatively long time, and it results in an overall CAGR of nearly 20% for the next five years.
As mentioned, TSMC only needs to grow its stock price by 11% each year to become a $2 trillion company. So if its revenue growth can directly translate to stock price appreciation, then it's well on its way to a $2 trillion market cap, crushing the market along the way.
But that will happen only if the stock is reasonably valued.
Some stocks have years of growth already priced into them, so even if TSMC is expected to have a nearly a 20% CAGR over the next five years, that may already be baked into the stock price. Fortunately for investors, the stock trades at a reasonable level.
At 23.3 times forward earnings, TSMC's stock isn't as cheap as it was just a few months ago, but it's still reasonably priced from a market perspective. The S&P 500 trades for 22.8 times forward earnings, so the two are valued at about the same level.
