Taiwan Semiconductor Manufacturing: A Rising Star in the AI Chip Market

Over the past year, shares of Taiwan Semiconductor Manufacturing have impressively surged over 100%, elevating the chip manufacturer into an exclusive group known as the trillion-dollar club.

As of January 17, there are only ten publicly traded companies worldwide with valuations over $1 trillion. Among them, aside from Warren Buffett's Berkshire Hathaway, each trillion-dollar entity plays a significant role in the ongoing artificial intelligence (AI) transformation.

After a remarkable 110% increase in its stock value, TSMC has joined the ranks of its major client, Nvidia. With its current trading price hovering around $213, TSMC is nearing a 52-week high.

This article will delve into the possibility of TSMC initiating a stock split soon and what that could mean for investors.

Potential Reasons for a Stock Split

The chart of TSMC's market capitalization over the past year shows a nearly doubling of its valuation, going from around $500 billion to over $1 trillion. This rapid increase might make a stock split seem like a sensible strategy.

When a company executes a stock split, the total number of its outstanding shares rises significantly. For instance, when Nvidia conducted a 10-for-1 stock split, the outstanding shares increased tenfold while the share price fell by a factor of ten. Ultimately, stock splits do not alter the company’s valuation.

Because splits generate more outstanding shares, greater buying activity is required to boost share prices. This can signal a positive outlook from the management team regarding the company's future potential. By pursuing a stock split, TSMC might suggest confidence that the stock will continue to rise, even as achieving these gains becomes more challenging with increased share volume.

Reasons to Maintain Current Strategy

TSMC occupies a unique niche within the semiconductor industry, specializing in advanced manufacturing processes that produce chips for major players like Advanced Micro Devices and others.

Research indicates substantial investments are expected in AI infrastructure, reaching trillions over the coming years. Specifically, the market for graphics processing units (GPUs) is projected to amount to nearly $300 billion by the end of the decade. With companies like Microsoft, Amazon, Alphabet, and Meta Platforms all increasing their demand for chips, TSMC is likely to benefit from AI growth well into the future.

However, at over $200 per share, some might question whether TSMC's stock is becoming too expensive. It's crucial to note that relying solely on share price can be misleading. For context, though TSMC's stock stands at $200, Nvidia's is valued at $140, yet Nvidia boasts a market cap of $3.4 trillion—about three times that of TSMC.

Assessing TSMC as a Buy

To accurately determine if TSMC’s stock is overpriced, investors should consider its valuation multiples. TSMC’s projected price-to-earnings (P/E) ratio is currently 23.4, a figure close to the average P/E ratio for the S&P 500.

This suggests that TSMC is viewed similarly to broader market trends. When viewed through this lens, TSMC's rising valuation and high share price don't appear as steep as they might seem initially. Additionally, given the anticipated increase in AI-related capital expenditure over the next few years, it's likely that TSMC's stock could command a higher premium than that seen in the S&P 500 going forward.

Thus, many investors may find TSMC to be an attractive long-term holding, regardless of any potential stock split.

TSMC, AI, StockSplit