Nvidia (NASDAQ: NVDA) flew into the $1 trillion club in May 2023 as it benefited from growing spending on artificial intelligence. The chipmaker has since more than tripled in value, becoming the second most valuable company in the world, behind only Apple.
The rest of the $1 trillion club is full of some of Nvidia’s biggest customers, the “hyperscalers” that build massive data centers for training and running generative AI. But the newest member of the club is actually an important part of Nvidia’s supply chain. It’s not just Nvidia, though. This semiconductor company works closely with almost every tech company in the $1 trillion club, and now it’s finally a member itself.
Artificial intelligence (AI) chips’ latest entry into the $1 trillion club is Taiwanese semiconductor manufacturing company (NYSE: TSM). This is why $1 trillion could be just a milestone in the stock’s continued rise into the mega-cap ranks.
“The best in the world by an incredible margin”
Taiwan Semiconductor, or TSMC, is a chip manufacturer, also known as a foundry or fab. It is the top choice for many chip designers and attracts more than 60% of industry spending. There’s a good reason for that. TSMC’s technology is far beyond that of virtually any competitor.
At an investor conference last month, Nvidia CEO Jensen Huang said: “We’re exiting TSMC because it’s the best in the world. And it’s the best in the world, not by a small margin, it’s the best in the world by an incredible margin .”
This is evident from TSMC’s recent third quarter financial results. The company reported 39% year-over-year revenue growth. The gross margin grew from 54.3% last year to 57.8%, and the net result therefore grew by 54.2%. The driving force behind these great results is TSMC’s technological lead. That makes it the indispensable partner for anyone who wants to print advanced chips for AI (such as Nvidia’s GPUs) or smartphones (such as Apple’s iPhone).
“Our business was supported in the third quarter by strong smartphone and AI-related demand for our leading 3nm and 5nm technologies,” CFO Wendell Huang wrote in the earnings release.
The AI story may be just beginning
Management expects AI chip revenue to more than triple by 2024, but the segment will account for only a mid-teens percentage of TSMC’s total this year. There is a long road to growth for TSMC in AI, and it is investing to take advantage of the opportunities presented.
Nvidia is working with TSMC to print its chips, but it’s not the only AI chipmaker to benefit from the leading manufacturer’s advanced technology. Microsoft, Alphabet, Meta, BroadcomAnd Advanced micro devices have all signed a contract with TSMC to develop AI accelerator chips. Apple has been using TSMC for years to develop its chips for the iPhone and iPad, and more recently for the Mac.
In other words, regardless of how the future of AI data centers, large language model training, and AI inference plays out, TSMC will be a big winner.
Management has raised its 2024 capital expenditure expectations to over $30 billion, and expects to spend even more in 2025. Spending on research and development also increased by 11.4% year-on-year in the past quarter.
Both are keys to TSMC’s continued success. Being the largest foundry in the world by a wide margin, it is able to spend more on machinery and technology while improving its technological capabilities than any other competitor. That ensures it maintains its position as a technology leader, which in turn leads to ongoing relationships with the world’s largest customers. That virtuous cycle is a huge competitive advantage for TSMC that will be difficult to overcome.
$1 trillion may be just the beginning
Although TSMC shares more than doubled in 2024, there is still room for the stock to rise.
At its current share price, it trades for just over 25 times analysts’ 2025 earnings estimates. And that’s before they’ve had a chance to update their models with management’s latest results and guidance. Over the next five years, TSMC is capable of growing its bottom line at a rate of 20%. AI spending remains robust and the company can maintain its high gross margin through strong utilization even as it brings next-generation technology online. That level of growth more than justifies the current earnings multiple.
The most attractive thing about the company is that it is protected from future changes in the industry. Regardless of who designs the chips needed for data centers and smartphones, TSMC will surely capture the vast majority of that business, thanks to the virtuous cycle described above. Given management’s excellent execution in recent years amid the AI boom, the future continues to look bright for the newest member of the $1 trillion club.
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Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Adam Levy has positions in Alphabet, Apple, Meta Platforms, Microsoft and Taiwan Semiconductor Manufacturing. The Motley Fool holds positions in and recommends Advanced Micro Devices, Alphabet, Apple, Meta Platforms, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
Meet the Latest Artificial Intelligence (AI) Chip Stock to Join Nvidia in the $1 Trillion Club, originally published by The Motley Fool
