Companies

TSMC Breaks the $1 Trillion Market Cap: What Lies Ahead

Published October 24, 2024

Taiwan Semiconductor Manufacturing (TSMC) has reached an impressive milestone, crossing a market cap of $1 trillion. This remarkable achievement follows the company's strong financial performance for the third quarter. TSMC is now one of only nine companies globally to achieve such a high market value, excluding state-owned enterprises.

The company stands out in the semiconductor foundry market, driven by increasing demand for artificial intelligence (AI) computer chips. As TSMC continues to dominate, let’s explore what the future may hold for the stock.

Growth in High-Performance Computing

TSMC is currently the sole manufacturer capable of producing ultra-fast computer chips with the smallest transistor sizes available. Its advanced 3- and 5-nanometer technology nodes accounted for approximately half of the company's revenue in the recent quarter, highlighting the increasing prices and demand from chipmakers for these products. As a result of this strong demand, TSMC projects a 30% increase in revenue for 2024, measured in U.S. dollars.

Focusing specifically on the high-performance computing (HPC) segment, which includes AI computer chips, TSMC reported that HPC revenue constituted 51% of its total revenue in the third quarter. This is up from 42% in the same quarter last year, translating to $12 billion in HPC revenue compared to $7.26 billion in 2023—a staggering growth of about 65% year over year. Such a rapid increase in revenue is impressive for such a large corporation.

The management team anticipates sustained growth into 2025 and has unveiled plans for significant capital investments in new factories to meet future demand. Currently, TSMC is planning to spend $30 billion on capital expenditures in 2024, which should facilitate further revenue growth in 2025 and 2026 if these new facilities are fully operational.

Diverse Geographic Presence

One of the key transformations for TSMC will be its effort to diversify beyond its base in Taiwan. This strategic move aims to reduce the risk of supply chain disruptions caused by geopolitical tensions, especially considering the Chinese government’s military posturing regarding Taiwan.

Positive developments include the construction of three fabrication facilities in Arizona, with the first expected to ramp up production by early 2025. These plants will incorporate advanced processing technologies, crucial for serving the HPC market. Additionally, TSMC is also building facilities in Japan and Europe to further enhance its geographic diversity. The company plans to invest tens of billions, potentially exceeding $100 billion, in building new factories outside Taiwan over the next five to ten years. Investors should closely monitor these projects, as they are vital for minimizing geopolitical risks and determining whether the company can maintain similar profit margins outside of Taiwan.

The Path After Reaching $1 Trillion

With strong financial numbers, TSMC looks well-prepared for future growth. The company's net revenue rose by 36% year over year last quarter in U.S. dollar terms, with an operating margin of 47.5%. This resulted in an impressive 54.2% net income increase during the quarter. While sustained earnings growth at 50% is unlikely indefinitely, it is reasonable to expect that TSMC can achieve double-digit net income growth annually over the next five years due to the AI boom.

However, potential investors may want to tread carefully when considering TSMC stock. Since the beginning of 2023, the stock has surged by 170%, leading to a price-to-earnings (P/E) ratio exceeding 30—significantly higher than the average for the S&P 500. While TSMC may be superior to average businesses in the index and is positioned for faster earnings growth, the stock is trading at one of its highest P/E ratios historically, suggesting a risk of price correction.

Investing in TSMC following its milestone of surpassing a $1 trillion market cap is not without merit. It is plausible that in five years, the company's market cap could surpass its current value. Yet, given the stock's substantial appreciation of 170% in less than two years, it may not represent an irresistible investment opportunity.

TSMC, AI, Growth