Is Taiwan Semiconductor Manufacturing a million dollar stock?

Buying and holding strong companies for a long, long time is a tried and tested method of making money in the stock market because this strategy allows investors to not only capitalize on secular growth trends, but also to benefit from the power composition.

For example, a $10,000 investment made in stocks of Nvidia 10 years ago it is now worth more than $2.7 million. The market has rewarded Nvidia stock over the years thanks to its ability to capitalize on several secular growth trends such as video games, high-performance computing, connected cars and now artificial intelligence (AI).

Of course, not every stock could deliver Nvidia-like gains and turn $10,000 into more than a million dollars in a decade. However, investors looking to build a million dollar portfolio would do well to buy stocks Taiwan Semiconductor Manufacturing (TSM 1.51%). Let’s look at why buying this name as part of a diversified portfolio could help investors become millionaires over the long term.

The secular growth of the semiconductor market will give TSMC a big boost

The global semiconductor industry is expected to post sales of $1.47 trillion in 2030. This would be a nice jump compared to industry sales of $439 billion in 2020, indicating that the semiconductor market is poised to record a compound annual growth rate (CAGR). of almost 13% in this 10-year period.

For comparison, global semiconductor sales were $298 billion in 2010, meaning the industry grew at a CAGR of just 4% between 2010 and 2020. Thus, the global semiconductor industry is projected to grow in a much stronger pace by the end of the year. decade thanks to new catalysts such as AI that will drive growth in several end markets such as data centers, computers and smartphones.

Buying TSMC stock is one of the best ways to play this secular growth opportunity. That’s because the world’s leading chip makers and electronics manufacturers use TSMC’s manufacturing facilities to make their chips. More specifically, TSMC is the largest semiconductor foundry in the world, with a market share of nearly 62%. Its dominance in this space can be understood from the fact that the second-place foundry, Samsung, has a share of only 11%.

Allied Market Research estimates that the global semiconductor foundry market could reach $231 billion in revenue in 2032, compared to $107 billion in 2022. Assuming TSMC manages to retain a 60% share of this market at that moment, its top line could rise to $139 billion. However, as the following chart indicates, TSMC is unlikely to take that long to reach that point.

TSM Revenue Estimates for Current Fiscal Year Data by YCharts

One of the reasons analysts expect TSMC’s top line to grow at healthy double-digit rates is because of its focus on winning more foundry market share. Management recently approved a $30 billion capital spending plan. TSMC plans to use the money to upgrade its existing facilities for advanced chip manufacturing, as well as build new factories to “meet long-term capacity plans based on market demand forecasts.”

A key reason TSMC is set to invest so much in infrastructure is that it has been unable to keep up with demand for advanced chips. For example, TSMC customer Nvidia pointed out earlier this year that its popular chips such as the H200 and upcoming Blackwell AI processors are in limited supply.

Demand for TSMC’s advanced 3-nanometer (nm) chips is so strong that the order book is full until 2026. In addition, the Taiwanese giant is expected to raise prices for its 3nm chips by about 5%. At the same time, it expects to raise the price of its advanced chip packages by 20% to 30% in 2025.

More importantly, big TSMC customers like Nvidia agreed to the price hike. This is not surprising given how strong TSMC’s market share is in the foundry market, allowing it to enjoy solid pricing power in this space.

TSMC’s growth may turn out to be better than expected

Analysts expect TSMC to grow revenue by 27% in 2024 to $88 billion. However, its revenue in the first seven months of the year grew at a faster rate of 30.5%. Its revenue for July grew at an even faster rate of 44.5%. Unsurprisingly, TSMC’s revenue growth estimates have been rising lately, as we’ve seen in the chart above.

This trend could continue due to TSMC’s efforts to increase its market share through capacity investments, which bodes well for the company’s future given the long-term opportunity present in the semiconductor industry. All in all, TSMC should be able to sustain its healthy growth levels for a long time and could become an integral part of a multi-billion dollar portfolio.