Taiwan Semiconductor (TSM), the world’s largest contract chipmaker, has been among the companies capitalizing on the sustained momentum in the ongoing AI boom, rising more than 29% year-to-date.
That represents a notable outperformance compared to the broader market, with the S&P 500 gaining 7.3% during that period.
However, analysts at Bernstein believe the Taiwanese chip manufacturer has more to offer.
Citing a 25% compound annual growth rate (CAGR) in earnings over two years and a modest 18x one-year forward price-to-earnings ratio, Bernstein raised its price target to NT$900 and maintained an Outperform rating.
That implies a roughly 17% upside from the current levels.
Bernstein also predicts that Taiwan Semiconductor's gross margin (GM) will outperform expectations.
In the fourth quarter of 2023, the 3nm technology had a 3-4% negative impact on the company's average gross margin, and this is expected to continue in the second half of 2024, indicating no additional drag.
However, factors such as a 1-2% impact from capacity conversion and a 30% year-over-year increase in depreciation costs are seen as incremental pressures. Despite these challenges, the analysts believe that the rise in labor and "Others" costs of goods sold (COGS) will not match the anticipated 20-25% revenue growth.
This, combined with operating leverage, is expected to lead to higher gross margins in the second half of 2024 compared to the first half, in their view.
“For 2025, 3nm drag should diminish if not end, but revenue rising nearly 20% should sustain operating leverage to further drive GM to surpass 55%,” the analysts at Bernstein wrote.
Moreover, the broker expects an increase in capital expenditure for TSM, from US$30 billion this year to US$33 billion in 2025/26, remaining below the 2022 peak of US$36 billion.
Concurrently, free cash flow is anticipated to significantly grow, with projections indicating a rise in cash dividend from NT$13 per share in 2023 to NT$24 per share by 2026.