Taiwan Semiconductor: A Promising Investment Echoing 2020 Success
Past performance can help guide future predictions, especially for cyclical companies. Currently, Taiwan Semiconductor Manufacturing (NYSE: TSM) is displaying a setup reminiscent of 2020, when its stock doubled. Could similar results be on the horizon for 2025?
Emerging Revenue Trends Signal Growth
Taiwan Semiconductor is the largest independent chip manufacturer globally. It collaborates with major clients like Nvidia (NASDAQ: NVDA) and Apple (NASDAQ: AAPL), powering many of today’s most advanced devices.
The company’s leading-edge technology includes the ability to produce chips using the advanced 3nm process. Each subsequent reduction in chip size traditionally means improved power and efficiency. Not stopping there, Taiwan Semi is already preparing to launch a 2nm process by late 2025, marking a similar trajectory to its advancements in 2020.
In 2020, Taiwan Semiconductor introduced its 5nm chips amid a surge in demand as the COVID-19 pandemic reshaped global market needs. This trend drove many people to upgrade their technology for remote work and communication tools.
Fast forward to 2025, and the demand for AI chips has escalated. During Q3 2023, management projected that sales of AI chips would grow at a 50% compound annual rate over the next five years, contributing to a low teens percentage of total revenue by then.
Interestingly, growth in AI revenue is already exceeding expectations, with projections indicating it could triple in 2024. This trend suggests the robust demand for AI technology could mirror the earlier surge seen during the pandemic.
Current Valuation Echoes Pre-Pandemic Levels
Although TSMC stock nearly doubled in 2024, it started from a low valuation of about 19 times earnings, especially when compared to lower-growth companies like Kroger, which traded at 18 times earnings. Investors who recognized the disparity seized the opportunity, resulting in significant gains as the stock’s valuation climbed throughout the year.
Today, TSMC trades at a valuation marginally above its 2020 position. Despite being slightly more expensive now, the comparison is relevant, as stock performance rebounded dramatically after initial fears surrounding COVID-19. This growth persisted into 2022 after a period of weaker sales in 2018 and 2019.
From 2020 through mid-2022, TSMC witnessed remarkable growth, and the current climate shares similarities with that initial phase. As demand for AI technology continues to grow, it appears poised for additional growth in the coming years.
Evaluating the Potential for Future Returns
Could Taiwan Semiconductor’s stock double in value next year? While uncertain, the current environment resembles the conditions which facilitated similar achievements in the past. Regardless of whether the stock achieves the same doubling effect, TSMC remains a solid investment opportunity likely to outperform the broader market in 2025.
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Keithen Drury has positions in Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Apple, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
