Taiwan Semiconductor Manufacturing: A Trillion-Dollar AI Chip Stock with 110% Growth

The shares of Taiwan Semiconductor Manufacturing (TSMC) have surged over 100% in the past year, solidifying its position in the exclusive trillion-dollar club. As of January 17, there are only ten public companies worldwide with valuations exceeding $1 trillion. Besides Warren Buffett's investment firm, Berkshire Hathaway, all trillion-dollar stocks are significantly contributing to the ongoing artificial intelligence (AI) revolution.

With a remarkable increase of 110% in the last year, TSMC (TSM -1.53%) has joined the ranks of major clients like Nvidia in this elite club. Currently, TSMC's stock trades around $213, close to its 52-week high.

This article examines the possibility of TSMC announcing a stock split soon and how this decision could affect its investors.

Why might TSMC explore a stock split?

The chart tracking TSMC's market cap reveals an impressive valuation growth over the past year. In twelve months, the company's market cap has effectively doubled from approximately $500 billion to over $1 trillion. This significant valuation increase makes the consideration of a stock split timely.

When a company decides to split its stock, it increases the number of outstanding shares. For instance, when Nvidia executed a 10-for-1 stock split a few months ago, it multiplied its outstanding shares while the price per share decreased proportionately. Ultimately, stock splits do not change a company’s overall valuation.

By increasing the number of shares, it then requires much more buying activity to elevate the stock price further. Therefore, a stock split might signal that the management is optimistic about the company’s future, indicating they believe the stock will continue to appreciate despite the higher number of outstanding shares which can make unlocking future gains more challenging.

Why TSMC may choose to maintain the status quo

TSMC operates in a unique niche within the semiconductor industry, specializing in intricate manufacturing processes that produce chips for many leading companies, including Advanced Micro Devices and Nvidia.

Research suggests that investments in AI infrastructure will reach trillions of dollars in the years to come. The total addressable market for graphic processing units (GPUs) alone is projected to approach $300 billion by the decade's end. With major companies like Microsoft, Amazon, Alphabet, and Meta Platforms ramping up adoption of advanced chip technology, TSMC is positioned to benefit from these AI trends for years.

At a price point above $200 per share, one might wonder if TSMC’s stock is becoming too expensive. However, this perspective requires careful consideration.

Simply comparing share prices does not provide a complete picture of valuation. Even though TSMC’s stock is priced at $200 and Nvidia’s is at $140, this does not imply that TSMC is inherently more valuable. In fact, Nvidia's market cap is approximately $3.4 trillion, making it nearly three times that of TSMC.

Is Taiwan Semiconductor stock a buy right now?

To assess whether TSMC stock is overvalued, investors should consider valuation multiples. According to recent data, TSMC's forward price-to-earnings (P/E) ratio stands at 23.4, nearly matching the average forward P/E of the S&P 500.

These factors suggest that investors regard a position in TSMC as having equivalent upside potential as the broader market. In this light, TSMC's soaring valuation and high share price do not seem as unreasonable. Moreover, with anticipated increases in AI capital spending over the coming years, TSMC is likely to command a significant premium compared to the S&P 500 in the future.

For these reasons, TSMC appears to be a strong long-term buy-and-hold opportunity, independent of any potential stock split.

TSMC, AI, Stocks