Welcome the Latest Entrant to the Billion-Dollar Stock Elite
Welcome the Latest Entrant to the Billion-Dollar Stock Elite
The $1 trillion valuation club is an elite group that only a handful of companies have manage to join. At the time of writing, only 10 companies globally have achieved this milestone. The latest addition to this elite club is Taiwan Semiconductor Manufacturing Company Limited (TSMC), although its market cap can sometimes dip below this figure due to daily trading fluctuations.
TSMC is the world's largest contract chip manufacturer, and its growth has been substantial in recent years as we continuously adopt more complex technological devices. The recent spike that pushed its market cap over the $1 trillion mark was driven by demand for chips used in artificial intelligence (AI), and this trend doesn't seem to be slowing down anytime soon.
Constant innovation is key to TSMC's success
TSMC's success can be attributed to its culture of continuous innovation. While other chip manufacturers struggled to produce certain technologies, TSMC has often been a trailblazer in these developments.
For instance, the most advanced chip technology currently available is 3 nanometer (nm) chips. The number indicates the spacing between electrical traces on the chip. The smaller the number, the more transistors can fit onto a chip, leading to improved power or energy efficiency, depending on how it's configured.
3nm technology started contributing significantly to TSMC's revenue in the third quarter of last year and now makes up approximately 30% of its overall revenue in this year's third quarter. Impressive as 3nm technology is, TSMC is not resting on its laurels. It's actively working on even smaller 2nm chips, which management projects will start contributing to revenue in 2025 and see a major surge in 2026. Early demand for these 2nm chips is expected to surpass that of 3nm and 5nm chips due to their improved energy efficiency.
This is beneficial for energy-intensive tasks like AI processing, as the cost of running a data center is significant. It's also advantageous for smartphones, as consumers are always looking for longer-lasting batteries.
Demand for AI chips remains high, despite the innovation on the horizon.
Massive revenue growth is projected over the next few years
In the second quarter of 2023, management forecasted that AI revenue would grow at a 50% compound annual growth rate (CAGR) over the next five years, accounting for a low-teens percentage of revenue. However, TSMC surpassed these predictions.
Management now expects AI-related products to triple in revenue by the end of this year and account for a mid-teens percentage of overall revenue. This rapid growth further strengthens TSMC's investment case.
Overall, the company's revenue is projected to grow at a 15% to 20% CAGR over the "next several years." This is a fast growth projection given TSMC's size, and the massive AI revenue is likely pushing TSMC's CAGR toward the high end of this range.
Considering the market (measured by the S&P 500) usually grows at a 10% CAGR over the long term, management's projection suggests that TSMC has a high probability of outperforming the market in the future, as long as it's priced reasonably.
If the stock is already priced to reflect this growth, then investors have little to gain by holding onto it. However, the stock is moderately priced from a forward price-to-earnings (P/E) perspective.
Compared to the S&P 500's forward P/E ratio of 24.6, TSMC's stock isn't excessively priced, especially considering its projected growth rate is faster than the S&P 500. With the stock trading at a reasonable level and strong growth projected ahead, TSMC's growth is far from over, even at its $1 trillion valuation. I believe TSMC is a top buy now, as it has several key growth drivers on the horizon, and it's one of my top ways to invest in the AI arms race.
TSMC's impressive growth in the semiconductor industry has been partially fueled by financing and investing in its research and development of advanced chip technologies. The company's continuous investment in cutting-edge technologies, such as 2nm chips, is expected to drive substantial revenue growth in the future.
With the demand for energy-efficient chips, particularly for AI and smartphone applications, TSMC's financial position and strategic investments in technology developments make it an attractive choice for investors seeking opportunities in the technology sector.