Taiwanese semiconductor manufacturing (NYSE: TSM) just hit thin air. The semiconductor giant – known as TSMC – just surpassed a $1 trillion market cap after reporting phenomenal growth for the third quarter. Excluding state-owned companies, this is the ninth company in the world to reach a market value of more than $1 trillion.
TSMC is directly benefiting from growing spending on artificial intelligence (AI) computer chips, dominating the semiconductor foundry market and showing no signs of slowing down. Here’s what could happen next for the stock.
TSMC is the only company in the world that can produce ultra-fast computer chips with the smallest transistor length. These 3- and 5-nanometer “nodes” accounted for about half of the company’s revenue in the third quarter, demonstrating high prices and rising demand among computer chip companies for these products. Because of this demand, TSMC now forecasts 30% revenue growth in US dollars by 2024.
Let’s break down this growth from the high-performance compute (HPC) segment, where TSMC classifies spending on AI computer chips. In the third quarter of 2024, HPC chip sales amounted to 51% of total sales. In the same quarter last year this accounted for 42% of turnover. This means there was $12 billion in HPC revenue last quarter, compared to $7.26 billion in 2023 (in US dollar terms), or approximately 65% year-over-year revenue growth. This is astonishing growth for a company this large.
Management sees growth continuing through 2025. The company is investing in new factories to anticipate demand in the coming years. According to the latest update, it plans to spend $30 billion on capital expenditures by 2024. This in turn should lead to sales growth in 2025 and 2026, as long as these new factories are used.
A big change for TSMC in the coming years will be diversification beyond its home market in Taiwan. The company and its customers want to prevent Taiwan from becoming a bottleneck for semiconductor supplies due to the Chinese government’s military rhetoric around the island.
The good news is that these new factories are currently being built. Three production facilities are being built in Arizona, with first production expected to occur in early 2025. It has advanced process nodes, allowing it to serve customers for the all-important HPC segment. The second and third facilities will hopefully be ready by the end of this decade.
TSMC also has facilities under construction in Japan and Europe to promote geographic diversification. Management plans to spend tens of billions and perhaps more than $100 billion on new factories outside Taiwan over the next five to 10 years. Investors should keep an eye on these developments as they will be important in helping alleviate geopolitical risk while testing whether the same profit margins can be replicated outside of Taiwan.
TSM data by YCharts
TSMC’s financial statements look solid and the company appears poised for growth in the coming years. Net sales increased 36% year-over-year in US dollars last quarter, with operating margin increasing to 47.5%. This led to monstrous net profit growth of 54.2% in the quarter. While 50% earnings growth won’t happen forever, I think it’s likely that TSMC can grow net revenues by double digits on average over the next five years as a result of the AI boom.
But does that make the stock a buy? I’m not so sure. Since the start of 2023, TSMC shares are up 170%. The current price-to-earnings ratio (P/E) is well above 30, which is above 30 S&P500 index average. Yes, TSMC is a better company than the average in the index and should grow earnings faster than the average listed stock. However, the stock is trading at one of the highest price-to-earnings ratios in history. That makes it ripe for multiple compression risk and reversion to the mean.
I wouldn’t blame an investor for buying TSMC after it surpassed a trillion dollars in market value. I think in five years it’s more likely than not that the market cap will be larger than it is today. I just don’t think the stock is a can’t-miss opportunity after rising 170% in less than two years.
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool holds and recommends Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
This AI Giant Just Broke the $1 Trillion Market Cap Barrier: Here’s What Comes Next Originally published by The Motley Fool
