Stock-Split Watch: Is TSMC Next?

Many of the world's largest tech companies routinely split their stocks as their share prices rise. Splits don't make a stock fundamentally cheaper, since they simply cut its existing shares into smaller slices which trade at lower prices. So instead of buying a whole pizza for $20, you're simply getting a quarter of a slice for $5.

Yet stock splits still attract a lot of attention from smaller investors who aren't willing to pay hundreds or thousands of dollars for a single share of a hot stock. They can also make it cheaper to trade options for a high-priced stock, since each contract is tethered to 100 shares, and easier for companies to subsidize their salaries with stock options and bonuses.

Image source: Getty Images.

Therefore, investors should still keep an eye out for potential stock splits in the future. One of those stocks might be Taiwan Semiconductor Manufacturing (NYSE: TSM), the world's largest and most-advanced contract chipmaker. Let's take a look at TSMC's growth trajectory and its previous splits, and see if it's ready to split its stock again as it trades near its record highs.

TSMC has a long history of stock splits

TSMC went public in Taiwan in 1994, and it became the first Taiwanese chipmaker to list its American depositary receipts (ADRs), which are each worth five of its Taipei shares, on the New York Stock Exchange in 1997. TSMC has split its stock 10 times since its public debut.

But as the following table illustrates, TSMC only gradually increased its number of outstanding shares with minor splits over the past 26 years. Each ADR share of TSMC that was bought back in 1997 has now been split into 4.7 shares.

Data source: TSMC.

TSMC's ADR shares have risen 1,950% since its last stock split in 2009. With its shares now trading at about $200, it might be time to split its shares again. But TSMC's management hasn't said anything about a potential stock split at all.

How much higher could TSMC's stock soar?

TSMC manufactures chips for "fabless" chipmakers that don't have their own fabrication faciltiies. From 1997 to 2022, the company shrank its chipmaking nodes from 300 nm to 3 nm. It plans to start mass producing its first 2 nm chips in 2025.

It costs a lot of money to stay in that "process race" to manufacture smaller and denser chips. Over the past three decades, most of TSMC's rivals either exited that capital-intensive market or stopped trying to produce smaller chips. Today, only three foundries can produce chips beyond the 10 nm node: TSMC, Samsung, and Intel. Samsung and Intel can't match TSMC's transistor densities yet, so most of the world's top-fabless chipmakers still use TSMC's top-tier foundries.

From 1997 to 2023, TSMC's revenue and net income both increased at a compound annual growth rate (CAGR) of 16% in new Taiwan dollars (NTD) terms. From 2023 to 2026, analysts expect its revenue and net income to grow at a CAGR of 25% and 28%, respectively. Those are stellar growth rates for a stock which trades at just 19 times next-year's earnings.

TSMC's growth is still tightly tethered to the cyclical-semiconductor sector, but it's grown through plenty of boom and bust cycles before. Intel is trying to reclaim the process lead from TSMC, but several recent reports suggest it could finally spin off or sell its foundries instead of trying to stay in the race. The only "black swan" event which might derail TSMC's growth would be China's military blockade or invasion of Taiwan, but that dreaded escalation would likely crush other stocks as well.

What should investors be paying attention to?

TSMC probably won't split its stock anytime soon, but it still has a bright future. For now, investors should see if TSMC can stay ahead of Samsung and Intel in the process race, successfully ramp up its production of 2 nm chips next year, and gradually transition to ASML's newest "high-NA" extreme ultraviolet (EUV) lithography systems -- which cost a whopping $380 million each -- to manufacture even smaller chips beyond the 2 nm node. If it can achieve those goals, it should head a lot higher over the next few years as the semiconductor market expands.

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Leo Sun has positions in ASML. The Motley Fool has positions in and recommends ASML and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.