Semiconductor stocks have been in impressive form on the market over the past three years, as the demand for chips used for training and deploying artificial intelligence (AI) models in data centers has shot up remarkably during this period.
Not surprisingly, the PHLX Semiconductor Sector index’s gains of 44% in the past three years have been higher than the 29% jump clocked by the tech-laden Nasdaq-100 Technology Sector index over the same period. Taiwan Semiconductor Manufacturing (NYSE: TSM), or TSMC, has been one of the big beneficiaries of the spurt in semiconductor spending, with its shares rising 69% in the past three years (as of this writing).
TSMC’s solid rally has brought its market cap to $980 billion. The good part is that this semiconductor bellwether seems capable of delivering more upside in the long run as well, and it may even hit $2 trillion in market cap.
Let’s look at the reasons why.
It is easy to see why TSMC stock has shot up. The company fabricates chips for all the major chip designers, including Nvidia and AMD. In fact, all the fabless chipmakers that have been designing AI chips are using TSMC’s fabrication plants to produce their chips.
Consumer electronics companies such as Apple that are looking to offer AI solutions to their customers in their devices also tap TSMC to manufacture advanced processors. All this explains why the Taiwan-based foundry giant has seen a sharp uptick in its growth in the past year.
More importantly, TSMC’s dominant 64% share of the global foundry market means that it is well-placed to make the most of the secular growth in the AI chip market over the long run. According to one estimate, the global AI chip market could reach an annual growth rate of almost 35% over the next decade. The market’s impressive growth is expected to be powered by the penetration of AI into multiple industries ranging from healthcare to finance to automotive, among others.
As TSMC manufactures chips for the leading chip designers serving these industries, including the likes of Qualcomm and Broadcom, the company should ideally be able to sustain the healthy growth that it has been clocking in the past year. This is precisely what management pointed out on the company’s January earnings conference call:
Underpinned by our technology leadership and broader customer base, we now forecast the revenue growth from AI accelerators to approach a mid-40% CAGR for the five-year period starting off the already higher base of 2024. We expect AI accelerator to be the strongest driver of our HPC platform growth and the largest contributor in terms of our overall incremental revenue growth in the next several years.
