1 Top Tech Stock to Buy Hand Over Fist Before TSMC’s Spending Spree Begins

Taiwan Semiconductor Manufacturing (TSM -4.74%)popularly known as TSMC, is the world’s largest semiconductor foundry that produces chips for fabless semiconductor companies. His clients include popular names such as Nvidia, Apple, Advanced microdevices, Broadcom, Qualcommand others.

TSMC controls 62% of the global foundry market, enjoying a significant lead over second place Samsungwhich has a market share of only 13%. So TSMC is in a strong position to make the most of the secular long-term growth opportunity in the semiconductor market, which is getting a good boost thanks to a new catalyst in the form of artificial intelligence (AI) that is positively impacting several purposes. markets.

The growth potential of the semiconductor market is encouraging TSMC to increase capital spending

Global semiconductor market revenue will exceed $1.3 trillion in 2032, up from $547 billion last year. This explains why TSMC is set to spend heavily on improving its manufacturing footprint. The company’s board recently approved a $30 billion investment plan to install and upgrade advanced chip manufacturing facilities, build new factories, and also strengthen its advanced packaging capabilities and specialty chip manufacturing.

It’s worth noting that TSMC spent a similar amount of money in 2023 on capital expenditures. However, it will not be surprising to see TSMC gradually increase capital levels. The company plans to spend between $30 billion and $32 billion on capital expenditures in 2024, compared to its previous estimate of $28 billion to $30 billion. Analysts expect its capital spending to reach the higher end of this range.

More importantly, analysts expect TSMC’s capex to reach $37 billion in 2025. On the other hand, The Wall Street Journal recently reported that TSMC and Samsung are considering a $100 billion investment to build huge chip manufacturing facilities in the Middle East as part of their global expansion strategy. So there is a good chance that spending on semiconductor manufacturing equipment could lead to higher investments by TSMC and Samsung.

TSMC’s potential capital increase suggests the company will spend more to buy chip-making equipment, especially high-end equipment, so it can meet demand for chips made on advanced manufacturing processes such as 3-nanometer nodes (nm) and 2 nm.

For example, TSMC’s 3nm process node production capacity is currently full due to demand from companies such as Intel and Apple. Meanwhile, Apple is looking to secure all of TSMC’s 2nm manufacturing capacity for its 2025 iPhones. This all bodes well for a key TSMC supplier that is vital to producing these advanced chips — ASML Holding (ASML -1.28%).

ASML Holding’s growth is set to accelerate

Dutch semiconductor equipment giant ASML has a monopoly on the market for extreme ultraviolet (EUV) lithography machines that are used to make advanced chips based on small process nodes such as 5nm and 3nm. Not surprisingly, chipmakers like Samsung, TSMC, and Intel have lined up to buy advanced ASML machines so they can produce faster, more energy-efficient chips.

This led ASML to report a massive order backlog of €39 billion, which is higher than the company’s 2024 forecast of €27.5 billion. Oddly, ASML expects its revenue to remain flat in 2024 compared to 2023, but recent developments in the semiconductor industry’s capital suggest better times are ahead for the company.

According to consensus estimates, ASML’s revenue in 2024 could increase by 5% to $30.9 billion. However, forecasts for the next two years have increased and indicate a nice acceleration in its growth.

ASML Revenue Estimates for Next Fiscal Year Data by YCharts

That won’t be surprising given the huge amounts of money that TSMC and other chipmakers plan to spend to bolster their manufacturing capabilities. It’s worth noting that ASML got 29% of its revenue from customers in Taiwan last year, indicating that TSMC is most likely a big customer for the Dutch company.

Investors should also note that South Korean customers accounted for 25% of ASML’s net sales in 2023. So rumors of Samsung spending in the Middle East, as mentioned earlier, could be a catalyst for ASML. In addition, South Korean memory maker SK Hynix is ​​also said to be in line to acquire ASML’s advanced chip manufacturing equipment.

All this explains why the EUV lithography machine market is expected to reach $50 billion by 2039, compared to $8 billion in 2022. Therefore, ASML could see tremendous revenue growth over the next five years, as chipmakers add more money to its offerings. make advanced tokens.

Hence, now would be a good time for investors to buy ASML shares as it trades at 28 times forward earnings, a multiple of 35 to its five-year average earnings and also to the sector’s earnings ratio US tech of 45. The stock may have underperformed the broader market this year, with gains of just 7%, but could break out of that mediocrity thanks to an increase in capital spending by chipmakers such as TSMC and others.