Key Points
Shares of Taiwan Semiconductor Manufacturing Co. (NYSE: TSM) have nearly tripled in value over the past five years, turning a $1,000 investment into $2,800 at the time of writing. The growing demand for data center infrastructure presents a significant opportunity for TSMC, as high-performance computing chips currently account for the majority of its revenue.
Despite the stock’s strong run over the past few years, its valuation still allows for substantial upside over the next five years.
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Growth at a reasonable price
Analysts expect the company’s earnings per share to grow at a 22% annualized rate over the next few years. The stock’s valuation reflects the company’s recent momentum, with the shares trading at a price-to-earnings (P/E) multiple of 30. However, this valuation does not fully account for future earnings growth, as the P/E multiple drops to 23 on 2026 earnings estimates.
TSMC’s third-quarter earnings per share jumped 39% year over year, reflecting its competitive moat in making the most powerful chips for other semiconductor companies. Management expects revenue from artificial intelligence (AI) chips to grow at a compound annual rate of over 40% through 2029.
This is a business with a long history of delivering above-average returns for shareholders. This is why it is a bullish sign that management is investing to expand its global manufacturing footprint, supporting demand. CEO C.C. Wei described the demand for AI chips as “insane” last quarter, which may also signal that investors are still underestimating the growth opportunity ahead.
With robust earnings growth and investments in expanding manufacturing capacity, Taiwan Semiconductor stock remains an excellent buy for investors seeking to outperform the market.
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John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.