Taiwan Semiconductor's Revenue Is Booming. Is the Stock a Buy?

Companies listed in the U.S. are only required to divulge their financials once per quarter. However, some companies offer more information to investors to keep them better informed on the current state of the business.

Taiwan Semiconductor Manufacturing (NYSE: TSM) -- also known as TSMC -- is one of those companies that offers more than basic information as it reports its monthly revenue shortly after each month has wrapped up. This gives us some clues about how TSMC is doing more often.

Spoiler alert: It's doing fantastically. But does it add up to a stock that's worth buying right now?

TSMC is experiencing strong growth

Taiwan Semiconductor is the world's leading contract chip manufacturer. Essentially, a company like Apple or Nvidia comes to TSMC with either a full design or an idea of what it wants, and TSMC produces it. As a result, an investment in TSMC isn't a bet on a particular product or business. It's a bet that technology will use more chips and more advanced technology.

That's pretty much a softball toss, as it's obvious that that's the direction society is heading, especially with the popularity of artificial intelligence (AI) and various electronic devices.

This trend is so strong that Taiwan Semiconductor's management projects it will deliver compound annual revenue growth (CAGR) of 15% to 20% over the next "several years." Since TSMC has trailing 12-month revenue of $76 billion, that's an impressive projection.

With TSMC reporting its revenue every month, we don't need to wait until its third-quarter earnings report to find out how the company did. In the second quarter, management guided for between $22.4 billion and $23.2 billion in revenue. However, TSMC reports its monthly revenue in New Taiwan dollars (NT). Using management's assumed conversion rate of $1 to NT$32.5, its monthly revenue indicates that Q3 generated NT$759.8, or $23.38 billion.

That beat the high end of management's expectations, which shows that TSMC is doing well right now. It also indicates that revenue grew 35% year over year on a U.S. dollar basis, or 39% year over year on an NT dollar basis. Because there isn't much difference between these two figures, it shows that Taiwan's currency is pretty stable compared to the U.S. dollar, which is a great sign for investors.

It also shows that TSMC's growth rate is far ahead of what management predicts, but the CAGR metric management is talking about isn't based on one year of good performance. It is also meant to account for bad years (like 2023).

Investors will have to wait until Oct. 17 to learn more about TSMC's margins and outlook for the fourth quarter, but given the company's current performance, I think it's safe to say that the report will be well-received. However, TSMC isn't a cheap stock right now, so does this make it a buy?

The stock isn't as cheap as it used to be

As mentioned, TSMC isn't cheap. The stock trades for 33 times trailing earnings (which is a skewed metric because it still includes two quarters of poor 2023 results and one quarter of iffy 2024 results). But if forward earnings are used, it improves slightly.

TSM PE Ratio data by YCharts.

Still, 28.1 times forward earnings is a premium over the S&P 500, which trades at 23.5 times forward earnings. With TSMC slated to grow at an above-average pace, and its best-in-class offering, I think this premium is deserved.

With high growth baked into the market, the upside for the stock is a bit diminished. However, if you're patient, the long-term trends are still there for Taiwan Semi's stock to deliver market-beating returns over the next five years.

As a result, I think TSMC is a great buy today, as its growth rate should propel it to a market-beating strategy. However, I wouldn't expect the stock to repeat its 2024 year-to-date performance of 150% anytime soon.

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Keithen Drury has positions in Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Apple, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.