$1 trillion may just be a milestone in this company’s continued growth in the AI boom.
Nvidia (NVDA 0.78%) flew into the $1 trillion club in May 2023 as it capitalized on growing spending on artificial intelligence. The chipmaker has continued to increase more than three times in value since then, becoming the second most valuable company in the world, behind only. Apple.
The rest of the $1 trillion club is filled with some of Nvidia’s biggest customers, the “hyperscalers” that build massive data centers for training and managing generative AI. But the newest member of the club is actually a key part of Nvidia’s supply chain. It’s not just Nvidia, though. This semiconductor company works closely with almost every technology company in the $1 trillion club, and now it’s finally a member itself.
The latest artificial intelligence (AI) chip in the $1 trillion club is Taiwan Semiconductor Manufacturing Company (TSM -2.46%). Here’s why $1 trillion may just be a milestone in the stock’s continued ascent through the ranks of mega-caps.
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“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 first choice for many chip designers, attracting more than 60% of the spending in the industry. There is a good reason for that. TSMC’s technology is far more advanced than that of almost all competitors.
At an investor conference last month, Nvidia CEO Jensen Huang said: “We’re fabbing out 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 of the world by an incredible margin.”
This is evidenced in TSMC’s recent financial results for the third quarter. The company reported 39% revenue growth over the year. Its gross margin expanded to 57.8% from 54.3% last year, and net income grew by 54.2% as a result. The driving force behind these stellar results is TSMC’s technology leader. That makes it the indispensable partner for anyone who wants to print advanced chips for AI (like Nvidia’s GPU) or smartphones (like Apple’s iPhone).
“Our business in the third quarter was supported by strong smartphone and AI demand for our industry-leading 3nm and 5nm technologies,” CFO Wendell Huang wrote in the earnings release.
The story of AI may have just begun
Management expects revenue from AI chips to more than triple in 2024, but the segment will only account for a mid-teens percentage of TSMC’s total for the year. There is a long track to growth for TSMC in AI, and it is investing to take advantage of the opportunities presented.
Nvidia works with TSMC to print its chips, but it is not the only AI chipmaker that benefits from the fab’s advanced technology. Microsoft, Alphabet, Meta, Broadcomand Advanced Micro Devices they all contract with TSMC to develop AI accelerator chips. Apple has used TSMC for years to develop its chips for the iPhone and iPad, and more recently, the Mac.
In other words, no matter what the future of AI data centers, major language model training and AI inference plays out, TSMC is a big winner.
Management has increased its capital spending expectations for 2024 to more than $30 billion, and expects to spend even more in 2025. It is also spending on research and development, which increased 11.4% year over year. last quarter.
Both are key to TSMC’s continued success. As the largest foundry in the world by a wide margin, it is able to spend more on machinery and technology while advancing its technological capabilities than any other competitor. That ensures that it maintains its position as the technology leader, which in turn leads to continued relationships with the largest customers in the world. That virtuous cycle is a tremendous competitive advantage for TSMC that is hard to beat.
$1 trillion may be just the beginning
While TSMC shares have more than doubled in 2024, there is still room for the stock to climb higher.
At its current share price, it trades for just over 25 times analysts’ estimates for 2025 earnings. And that’s before they’ve had a chance to update their models with the best results recent and management guidance. In the next five years, TSMC is able to grow its bottom line at a rate of 20%. AI spending remains robust, and the company is able to maintain its high gross margin from strong utilization even as it brings the next generation of technology online. That level of growth more than justifies the multiplicity of current earnings.
What is more attractive about the company is that it is protected from future changes in the industry. No matter who designs the chips needed for data centers and smartphones, TSMC is sure to 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.
Suzanne Frey, an Alphabet executive, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and Facebook spokesperson and sister of Meta Platforms CEO Mark Zuckerberg, 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 has positions 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 on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.