Taiwan Semiconductor Manufacturing Surpasses $1 Trillion Market Cap: What Lies Ahead

Taiwan Semiconductor Manufacturing (TSMC) has reached a significant milestone by surpassing a market capitalization of $1 trillion after posting impressive growth for the third quarter of the year. This achievement positions TSMC as only the ninth company globally to attain such a remarkable market value, excluding state-owned firms.

TSMC is experiencing immense growth, primarily driven by the increasing investments in artificial intelligence (AI) computing chips. This semiconductor manufacturing leader is solidifying its dominance in the foundry market with no indications of a slow down. Let’s explore what the future holds for this tech giant.

High-Performance Computing Growth

TSMC stands as the sole manufacturer in the world capable of creating ultrahigh-speed computer chips featuring the smallest transistors. In the latest financial reports, chips produced at the 3- and 5-nanometer node levels constituted about half of TSMC's revenue in the third quarter, highlighting the robust demand and premium pricing that chip producers are willing to pay for these advanced products. Looking ahead, TSMC anticipates a revenue growth of 30% in U.S. dollar terms for 2024.

A closer look at the high-performance computing (HPC) segment, which includes spending on AI chips, reveals that HPC revenue accounted for a significant 51% of TSMC’s overall revenue in the third quarter. In contrast, this segment made up only 42% of total revenue during the same period last year. This equates to an impressive increase in HPC revenue from approximately $7.26 billion in 2023 to $12 billion last quarter, yielding around 65% year-over-year growth—a remarkable feat for a corporation of TSMC's size.

The company’s management anticipates continued growth through 2025, utilizing substantial capital expenditures to develop new factories to meet future demand. In fact, they plan to allocate $30 billion on capital expenditure in 2024, which should contribute to further revenue increases in 2025 and 2026, provided these new facilities are efficiently operational.

Geographic Expansion on the Horizon

TSMC is set to make significant changes in the coming years, focusing on expanding outside its primary base in Taiwan. This shift aims to minimize the risk of Taiwan becoming a potential chokepoint for semiconductor supply amid rising geopolitical tensions, particularly concerning the Chinese government.

Excitingly, TSMC is already in the process of constructing new factories. Three facilities are being developed in Arizona, with the first expected to begin high-volume production by early 2025. These facilities will focus on advanced processing nodes, essential for serving customers in the crucial HPC sector. The second and third factories are scheduled to be completed by the end of this decade.

Moreover, TSMC is also establishing production centers in Japan and Europe as a part of its geographic diversification strategy. The management plans to invest tens of billions, potentially exceeding $100 billion over the next five to ten years in these offshore facilities. Investors should monitor these developments closely, as they are crucial for mitigating geopolitical risks while exploring if the same profit margins can be achieved outside of Taiwan.

Future Prospects Post $1 Trillion Milestone

With solid financial statements, TSMC appears to be on a robust growth trajectory in the coming years. Last quarter, net revenue increased by 36% year-over-year in U.S. dollar terms, and the operating margin rose to 47.5%. This translated to a remarkable net income growth of 54.2% for the quarter. Although such extraordinary growth might not be sustainable indefinitely, it is reasonable to believe that TSMC could achieve a steady double-digit growth rate in net income annually over the next five years, primarily fueled by the AI boom.

However, the question remains: should investors buy TSMC stock? The answer isn't straightforward. Since the beginning of 2023, TSMC's stock has surged by 170%. Currently, its price-to-earnings (P/E) ratio sits above 30, which exceeds the average of the S&P 500 index. While TSMC is undoubtedly a superior business compared to the average firm represented in the index—set to grow earnings faster than the average publicly traded company—its stock is trading at one of its highest P/E ratios historically. This heightens the risk of potential stock price corrections and a return to mean valuations.

While one could justify purchasing TSMC shares after crossing the $1 trillion market cap threshold, it is more likely than not that the company's market value will continue to grow over the next five years. Nevertheless, following a 170% rise in less than two years, the stock does not present a definitive must-have investment opportunity at this time.

Technology, Growth, Investment