The rapid and accelerating adoption of artificial intelligence (AI) has been gathering momentum since early last year. The clearest evidence of these secular tailwinds can be found in the list of the world’s largest companies when measured by market cap. Indeed, 7 of the world’s 10 most valuable companies are arguably pioneers in the realm of AI.
Topping the charts are three of the world’s leading purveyors of technology. Apple takes the top spot at $3.4 trillion, and Microsoft and Nvidia aren’t far behind with market values of $3 trillion and $2.6 trillion, respectively.
With a market cap of roughly $832 billion (as of this writing), Taiwan Semiconductor Manufacturing (NYSE: TSM), often referred to as TSMC, might seem like a dark horse to join this exclusive fraternity, but the writing is on the wall. New use cases for generative AI are being discovered at a breakneck pace, making the semiconductors capable of these advanced calculations indispensable. As the largest foundry in the world, TSMC seems a shoo-in to join the ranks of this prestigious club.
Want chips with that?
TSMC has been quietly building its legacy for decades but has suddenly burst into the limelight. The company bills itself as the “world’s largest and best semiconductor foundry,” making it a critical player in the paradigm shift to AI.
Because AI can only be performed using the most cutting-edge semiconductors, TSMC is the leader in the field. Its customer list reads like a veritable “who’s who” of AI, including Nvidia, Arm Holdings, Advanced Micro Devices, Broadcom, Apple, and many more.
Furthermore, the shift to AI has realigned TSMC’s business over the past couple of years. While processors used in smartphones were once its largest platform, high-performance computing (HPC) — which includes AI — now accounts for more than half of TSMC’s revenue, representing 52% of sales.
Business is booming. Revenue grew 14% to $20.8 billion in the second quarter, while earnings per share (EPS) of $1.48 jumped 30%. Management is expecting the company’s good fortune to continue.
TSMC’s forecast is calling for second-quarter revenue of $22.8 billion at the midpoint of its guidance, or growth of about 32%. That forecast could end up being conservative. In July, the company reported revenue growth of 45% year over year, far ahead of management’s outlook.
The path to $1 trillion
TSMC occupies a unique place in the AI ecosystem. Since its processors are prized by the biggest players in the space, it occupies the pole position in the rapid adoption of generative AI — which has made headlines since early last year. Additionally, TSMC’s accelerating revenue growth provides the clearest proof the company is up to the task. It also suggests TSMC could easily ascend to the ranks of trillionaires.
According to Wall Street, TSMC is poised to generate revenue of $87.38 billion in 2024, giving it a forward price-to-sales ratio (P/S) of roughly 9.5. Assuming its P/S remains constant, TSM would have to grow its revenue to roughly $210 billion annually to support a $2 trillion market cap.
The company is forecasting growth to increase to “slightly above mid-20%” for 2024, and Wall Street is already seemingly on board, forecasting revenue growth of 27% and 26% in 2024 and 2025, respectively. If the company can clear those relatively low benchmarks, it will likely achieve a $2 trillion market cap by early 2029. However, given the accelerating adoption of AI, it could cross that threshold even sooner.
Another catalyst for TSMC is the potential represented by AI-powered smartphones, which could provide the catalyst for an accelerated upgrade cycle. As the leading provider of smartphone processors, TSMC would be an obvious beneficiary.
Estimates regarding the ongoing adoption of AI suggest that TSMC’s future is bright. Generative AI is expected to add between $2.6 trillion and $4.4 trillion to the global economy annually over the next 10 years, according to global management consulting firm McKinsey & Company. Even that could end up being conservative as estimates continue to climb as new applications for AI are uncovered.
Finally, at 28 times earnings, TSMC’s valuation is attractive, offering investors a compelling way to invest in the paradigm shift represented by AI.
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Danny Vena has positions in Apple, Microsoft, and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, 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.
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