No matter what technology you're talking about -- electric vehicles, artificial intelligence, smartphones, or practically any other high technology area -- they utilize a massive amount of chips. As a result, a neutral company like Taiwan Semiconductor Manufacturing Company (TSM 0.33%), also known as TSMC, makes for an excellent investment.
It also looks like a great value right now, and buying it now could make you look like a stock-investing genius in 2024.
TSMC is seeing the bottom of this chip cycle
TSMC is the world's largest contract chip manufacturer, which means it outsources its abilities to hardware producers like Apple and Nvidia. While it won't reach the highs that many of these businesses do, it won't go as low during a downturn. This makes TSMC an excellent investment for those who want exposure to tech but also want to be a bit more conservative.
But that doesn't mean investing in TSMC is completely safe. Right now it's amid a downturn, as many companies TSMC supplies chips to already have a substantial quantity of chips necessary to meet dwindling consumer demand, especially in the PC and smartphone markets. However, this downturn is nearing an end. CEO C.C. Wei said on TSMC's Q3 conference call that:
Those two segments [PC and smartphones] are the biggest segment for TSMC's business. We want to say that 2024 will be a very healthy growth. But right now, did we see the bottom? Very close. We want to -- I cannot give you a number, it's because it's too early to call it a sharp rebound.
So, this weakness may persist for a few more quarters, but it is near the end.
Additionally, artificial intelligence (AI) chip demand is starting to pick up pace. While these products only account for about 6% of current revenue, management expects this figure to rise to mid-double-digits within five years.
That's a great growth driver for TSMC, but its innovative technology will also contribute.
TSMC's continued innovation drives constant revenue growth
TSMC has risen to the top of its industry partly because it always seems to be leading the charge in introducing cutting-edge technology. For example, it launched 3-nanometer chips before rival Intel and at about the same time as Samsung.
NYSE: TSM
Key Data Points
It also has 2nm chips in the works for 2025 and has already started developing 1.4nm chips. With the space between transistors growing increasingly smaller, chip designers can pack more components in a small space, which can reduce the size, improve power consumption, and increase the computing power.
This allows TSMC to charge a premium on these chips over previous versions, which is almost like a built-in revenue escalator every two or three years.TSMC's continued innovation is important, as a chip company struggles when it doesn't innovate (just look at Intel).
The future looks bright for TSMC, but why is it a great buy now?
The stock trades below its historical average
TSMC has traded for about 19 times earnings for the past decade. It's slightly below that now, trading for 17 times 2024 earnings.
TSM PE Ratio data by YCharts
Should TSMC hit analyst earnings targets combined with the stock rising to its average valuation levels, then it has about 15% upside in 2024. Combine that with its 1.9% dividend yield, and you have a recipe for a stock that won't just beat the market; it'll crush it.
It's only a matter of time before people recognize this and pile into TSMC's stock, sending it much higher. All it takes is one good earnings report and the stock will likely shoot higher. As long-term investors, we don't need to wait for a single report -- we know one is coming. Taking a position now with the mindset of holding for at least five years will give you the best chance to own this stock and achieve market-crushing returns.
