3 Reasons to Buy Taiwanese Semiconductor Stocks Like There’s No Tomorrow

Semiconductor from Taiwan (NYSE:TSM) it has been a great investment over the last five years. Its total return is around 350%, easily surpassing NASDAQ100 and S&P500which increased by 170% and 110% respectively.

Even though TSMC has crushed the market for the last five years, I am confident that it will do so again in the next five years. That makes this stock worth buying now, and I have three reasons why it’s an attractive buy.

1. Strong revenue growth

Taiwan Semiconductor’s revenue growth is expected to be strong and steady over the next five years. Many headwinds, especially in the case of artificial intelligence (AI), are blowing in its favor.

Management believes AI chips will grow at a 50% compound annual growth rate (CAGR) through 2028, at which point they will account for about a dozen of the company’s total revenues. This is a large growth rate, and much of the future growth will be driven by 2 nanometer (nm) chip design.

While the current generation of chips is made on 3nm technology, the gains for the next generation are impressive. For 2nm chips that are configured to maintain the same speed as a 3nm chip, performance is expected to increase by 25-30%. Since energy is a huge operating expense for the data centers that power AI models, it’s no surprise that this innovation will be a hit with TSMC customers. Management is already seeing strong demand that has exceeded pre-production demand for the previous 3nm and 5nm generations.

All this takes into account the management’s forecast assuming revenue growth at a CAGR of 15-20% over the next few years. This is the fastest growth in the market and a key reason why TSMC will outperform the markets again.

2. Attractive share price

Despite TSMC’s good prospects, the share price is not very high. Based on its price-to-earnings (P/E) ratio, Taiwan Semi’s price is almost the same as it was five years ago. This is key because it shows you’re not drastically overpaying for TSMC stock.

TSM PE Ratio (Forward) data by YCharts.

Of course, it would be better to buy the stock in early 2023, but this price is no longer available. Instead, investors will have to pay about 27.6 times TSMC’s forward earnings, but that’s not that much of a premium compared to the indexes it’s compared to. For comparison, the S&P 500 and NASDAQ 100 indexes record profits of 23 and 29.2 times greater. That puts TSMC at a fairly reasonable price compared to the broader market, which should allay investors’ fears of overpaying for the stock despite a strong two years.

3. TSMC has a growing dividend

Taiwan Semiconductor isn’t on most dividend investors’ radar, which is a shame. While TSMC’s payouts aren’t huge, they do represent a decent chunk of the investment picture.

The dividend is not as consistent as other stocks because TSMC’s payout is based on New Taiwan (NT) dollars rather than US dollars. However, from a New Zealand dollar perspective, management’s policy is to “maintain a sustainable and steadily increasing cash dividend and to pay cash dividends in each year/quarter at a level not less than the previous year/quarter.”

TSMC’s policy of raising its dividend every year makes it an excellent dividend investment. Even though the yield is around 1.4%, it’s still a big part of TSMC’s investment thesis, especially if management consistently raises it.

Taiwan Semiconductor is expected to experience strong growth over the next five years and will be available for purchase at a fair price. Additionally, it pays a decent dividend, which is also expected to grow. Buying TSMC is as obvious as it gets and I expect it to easily outperform the market in the future.

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Keithen Drury holds positions in Taiwanese semiconductor manufacturing. The Motley Fool covers and recommends Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.