3 Reasons to Buy Taiwan Semiconductor Stock Like There’s No Tomorrow

Taiwan Semiconductor (TSM -4.74%) it has been a brilliant investment over the past five years. Its total yield is around 350%, easily exceeding it NASDAQ 100 and the S&P 500which increased by 170% and 110%, respectively.

Although TSMC has been a market-crushing stock for the past five years, I am confident that it will do so again in the next five. This makes the stock a strong buy now, and I have three reasons why it’s an attractive buy.

1. Strong revenue growth

Taiwan Semiconductor’s revenue growth is slated to be strong and steady over the next five years. Several tailwinds, especially in artificial intelligence (AI), are blowing in its favor.

Management believes that AI-related chips will grow at a compound annual growth rate (CAGR) of 50% through 2028, when they will offset its total revenue in the low teens. That’s a strong growth rate, and much of the future growth will be fueled by its 2-nanometer (nm) chip design.

While the current generation of chips is 3nm, the gains for the next generation are impressive. When configured to maintain the same speed as a 3nm chip, 2nm chips are expected to see a 25% to 30% improvement in efficiency. With energy being a massive operating cost for the data centers powering AI models, it’s no surprise that this innovation is set to be a hit for TSMC’s customers. Management is already seeing strong demand and has surpassed pre-production demand for previous 3nm and 5nm generations.

All of this is reflected in management’s projection to grow revenue at a CAGR of 15% to 20% over the next few years. That’s market-beating growth and a key reason why TSMC will once again outperform the markets going forward.

2. Attractive share price

Despite TSMC’s strong outlook, the stock isn’t priced that high. On a price-to-earnings (P/E) basis, Taiwan Semi is about the same price as it was five years ago. This is key because it shows you’re not drastically overpaying for TSMC stock.

TSM PE Ratio data (before) by YCharts.

Clearly, it would have been better to buy the stock in early 2023, but that price is no longer available. Instead, investors will have to pay about 27.6 times forward earnings for TSMC, but that’s not that big of a premium to the benchmarks it’s compared to. In comparison, the S&P 500 and NASDAQ 100 trade at 23 and 29.2 times forward earnings. That puts TSMC at a fairly reasonable price compared to the broader market, which should ease investors’ fears of overpaying for the stock despite two strong years.

3. TSMC has a growing dividend

Taiwan Semiconductor isn’t on most dividend investors’ radar, which is a shame. While TSMC’s payout isn’t massive, it’s a decent chunk of the investment picture.

Dividends are not as consistent as other stocks because TSMC’s payout is based on New Taiwan (NT) dollars, not US dollars. However, from the NT dollar’s point of view, management’s policy is to “maintain a sustainable and steadily growing cash dividend and to distribute the cash dividend each year/quarter at a level not less than that of the year / the previous quarter”.

TSMC’s policy of increasing its dividend every year makes it an excellent dividend investment. Even though the yield is around 1.4%, it’s still an important part of TSMC’s investment thesis, especially if management keeps growing it.

Taiwan Semiconductor is slated for strong growth over the next five years and can be acquired at a fair price. Plus, it pays a respectable dividend that is set to grow as well. TSMC is as straight forward as a buy and I expect them to easily outpace the market going forward.