Alphabet(NASDAQ: GOOG)(NASDAQ: GOOGL) is currently the fourth largest company in the world, with a market capitalization of just over $2 trillion, and has achieved this stellar valuation thanks to its dominant position in the search engine and digital advertising markets.
Despite its high market capitalization, Alphabet’s growth has not been very stable in recent years. The company faces increasing competition in the digital advertising space, while its efforts in artificial intelligence (AI) face challenges.
This is likely why analysts expect Alphabet’s profits to grow at a relatively slower pace of 20% per year over the next five years, down from 24% over the past five years.
GOOG Earnings Chart (Quarterly).
There are other tech stocks that are achieving faster growth by making the most of the lucrative AI opportunities. In this article, we take a closer look at one such name that could eclipse Alphabet’s market capitalization in the next five years.
Taiwanese semiconductor manufacturing(NYSE: TSM)Popularly known as TSMC, is a recent addition to the trillion-dollar market cap club. It is now the eighth largest company in the world by market capitalization, and its valuation is just over $1 trillion.
TSMC’s latest results have played a key role in growing it into a trillion-dollar company. The stock rose 10% following the release of third-quarter results on October 17, with better-than-expected numbers and improved expectations.
The semiconductor foundry specialist reported a 36% year-on-year revenue increase to $23.5 billion, while profit in US dollars rose 50% to $1.94 per share.
TSMC now expects to end 2024 with a 30% revenue spike, compared to its previous expectation of mid-20% growth. More importantly, its status as the largest semiconductor foundry in the world allows the company to take full advantage of the long-term growth of the industry it serves. TSMC manufactures chips for Nvidia, Intel, Advanced micro devices, Broadcom, AppleAnd Qualcommamong others.
This diverse customer base means TSMC will benefit from multiple fast-growing end markets, such as AI data center chips, generative AI smartphones and personal computers. For example, the size of the AI ​​semiconductor market could grow to $846 billion by 2035. All major players use TSMC’s foundries to produce their chips, including market leaders Nvidia and Broadcom.
Apple and Qualcomm have booked TSMC’s advanced chip manufacturing capacity until 2026 as both companies look to take full advantage of growing demand for AI-enabled smartphones and PCs. So, analysts have upgraded their growth expectations for TSMC for 2024, 2025 and 2026.
TSM revenue estimates for the next fiscal year
TSMC dominates the foundry market, with Counterpoint Research estimating that it has a 62% share of the global foundry market, compared to the 13% share held by second-place Samsung.
This gives TSMC strong pricing power: it is expected to increase the cost of its semiconductor wafers by 10% next year, and customers have reportedly agreed to the increases, according to Morgan Stanley.
So TSMC should enjoy higher margins, and it already has a stronger margin profile compared to Alphabet, which should ideally pave the way for stronger earnings growth.
The following chart shows that TSMC’s profits are expected to grow slightly faster than Alphabet’s in two of the next three years.
TSM EPS estimates for the current fiscal year
In 2026, TSMC is expected to generate $10.15 in earnings per share (EPS); Alphabet’s share price is expected to be just under $10. Analysts expect TSMC’s profits to grow 21.5% annually over the next five years, slightly higher than Alphabet’s estimates mentioned above.
And TSMC’s stronger margins and its leading position in a foundry market benefiting from growing demand for AI chips could ultimately lead to much stronger earnings growth in the long term. Assuming earnings increase by 20% in both 2027 and 2028, earnings could rise to $14.62 per share after five years (using 2026 earnings of $10.15 per share as a base).
Assuming the shares are currently trading at 35 times earnings (in line with the current profit margin, but at a discount to the US Technology Sector Index’s price-to-earnings ratio of 47), share prices could reach $512 reaches. That would represent a 156% jump from the stock’s current position, taking its market cap to $2.66 trillion after five years.
That will be enough to easily surpass Alphabet’s current market cap and could be enough to surpass Alphabet’s market cap in five years, especially if Alphabet continues to underperform the broader stock market due to concerns about how it handles the intense competition in the digital advertising and AI markets. .
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Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Advanced Micro Devices, Alphabet, Apple, Nvidia, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and Intel and recommends the following options: short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.
Prediction: 1 Stock That Will Be Worth More Than Alphabet in 5 Years was originally published by The Motley Fool
