Key Points
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High-performance semiconductors are the foundation of modern technology, and demand has surged in recent years.
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Taiwan Semiconductor is the leading provider of the most advanced semiconductors, and its customers are the Who’s Who of technology.
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Despite its crucial role in high-performance computing, AI, and data centers, the stock remains attractively priced.
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There are currently 13 companies with market caps of $1 trillion or more, but only four are members of the elite $3 trillion club (as of this writing): Nvidia at $5.3 trillion, Alphabet at $4.6 trillion, Apple at $4.3 trillion, and Microsoft at $3 trillion.
Aside from being the world’s most valuable companies, these titans of industry have another thing in common: they are all customers of Taiwan Semiconductor Manufacturing (NYSE: TSM), commonly known as TSMC. The company is the world’s largest and most respected semiconductor foundry, and I am convinced TSMC is poised to join the ranks of three-trillionaires in the years to come. The company’s chipmaking prowess is helping fuel the artificial intelligence (AI) boom, driving TSMC’s business and financial results to new heights.
Will AI create the world’s first trillionaire? Our team just released a report on the one little-known company, called an “Indispensable Monopoly” providing the critical technology Nvidia and Intel both need. Continue »
The company has a market capitalization of $2 trillion as I write this, meaning investors who buy TSMC stock right now could enjoy returns of 47% if it joins the prestigious $3 trillion club.
Image source: Getty Images.
A chip off the old block
TSMC is the world’s largest contract chipmaker. Its processes are unmatched, and it’s widely acknowledged as the most advanced semiconductor foundry. The company dominates the global chip market with a 72% share, and is responsible for more than 90% of the most advanced semiconductors. As a result, its business is booming as companies pivot to AI, which requires the world’s most sophisticated chips.
Furthermore, TSMC is the market leader in advanced process technology, including 5nm, 3nm, and 2nm chips (the smaller, the more complex). That’s why the company’s customer list reads like a Who’s Who of technology. In addition to those outlined above, other customers include Arm Holdings and Advanced Micro Devices, among others.
TSMC is the premier manufacturer of advanced processors used for data centers, high-performance computing, and AI — which account for 61% of sales. It also dominates the market for smartphone chips — which account for 26% of sales.
The numbers tell the tale
TSMC’s first-quarter results paint an impressive picture. Revenue of $35.9 billion jumped 41% year over year and 6% sequentially — marking its fourth consecutive quarter of accelerating growth — driving earnings per American Depository share up 58% to $3.49.
The company’s profitability continues to expand, as TSMC’s gross margin increased by 740 basis points year over year to 66.2% and its operating margin improved by 960 basis points to 58.1%. The company’s growing scale and leverage are expected to drive further margin expansion.
Management is predicting this trend will continue, as its Q2 outlook calls for revenue of $39.6 billion, up 38% year over year, and operating income of $22.7 billion, up 53%, both at the midpoint of its guidance. This includes gross profit margin of 66.5% and operating profit margin of 57.5%.
The path to $3 trillion
When it comes to pick-and-shovel plays to profit from the proliferation of AI, TSMC is the most obvious choice. With the world’s foremost technology companies among its customers, the company is well positioned to continue reaping the rewards.
Wall Street expects TSMC to generate revenue of $163.5 billion in 2026, giving it a forward price-to-sales (P/S) ratio of roughly 12. Assuming its P/S ratio remains constant, TSM will need to generate revenue of roughly $240 billion annually to support a $3 trillion market cap.
It’s no surprise, then, that analysts are forecasting revenue for TSMC of $207.1 billion and $253.3 billion in 2027 and 2028, respectively. If the company clears those relatively easy hurdles, it could reach a $3 trillion market cap as soon as 2028. That said, the company’s growth and Wall Street’s estimates have been growing exponentially in recent years, so that outlook may prove conservative.
Demand for cutting-edge AI-centric processors continues to accelerate, with the semiconductor market projected to reach nearly $1.1 trillion in 2030, according to McKinsey & Company. Demand for TSMC’s advanced process technology is surging, and those tailwinds are expected to continue for the foreseeable future.
Despite its accelerating growth, TSMC stock trades for just 25 times forward earnings (as of this writing, allowing savvy investors to buy this industry leader at an attractive price.
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Danny Vena, CPA has positions in Alphabet, Apple, Microsoft, and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Apple, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
