Semiconductors are laying the foundation for the artificial intelligence (AI) revolution, and this company will be at the heart of it.
Since early last year, we have seen rapid and accelerated adoption of artificial intelligence (AI) gain momentum. The clearest evidence of this secular tailwind can be seen in the list of the world’s largest companies, measured by market capitalization. In fact, it is no exaggeration to say that seven of the world’s 10 most valuable companies are pioneers in the field of AI.
Topping the chart are three of the world’s largest technology companies: Apple tops the list with a market cap of $3.4 trillion, with Microsoft and Nvidia close behind at $3 trillion and $2.6 trillion, respectively.
Taiwan Semiconductor Manufacturing, with a market capitalization of approximately $832 billion (as of the time of writing), (TSM 1.76%)The company, also known as TSMC, may seem like a dark horse joining this exclusive brotherhood, but the signs are clear: new use cases for generative AI are being discovered at a ferocious rate, making semiconductors capable of these advanced calculations essential. As the world’s largest foundry, TSMC seems a sure bet to join this prestigious club.
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After quietly building its legacy over decades, TSMC has suddenly been thrust into the spotlight: The company calls itself “the world’s largest and best semiconductor foundry” and is playing a key role in the paradigm shift to AI.
AI can only be run using cutting-edge semiconductors, and TSMC is a leader in this field: its customer list includes some of the biggest names in the AI industry, including Nvidia, Arm Holdings, Advanced Micro Devices, Broadcom, and Apple.
Moreover, the shift to AI has reshaped TSMC’s business over the past few years: While processors used in smartphones were once the company’s largest platform, high-performance computing (HPC), which includes AI, now accounts for more than half of TSMC’s revenue and 52% of its sales.
Business is good: Revenues rose 14% to $20.8 billion in the second quarter, and earnings per share rose 30% to $1.48, and management expects the company’s performance to continue.
TSMC forecasts second-quarter revenue of $22.8 billion at the midpoint of its guidance, or growth of about 32%. That forecast is likely to be conservative: The company reported 45% year-over-year revenue growth in July, well above management’s outlook.
The Road to $1 Trillion
TSMC holds a unique position in the AI ecosystem. Its processors are highly regarded by the biggest companies in the field, putting the company at the forefront of the rapid adoption of generative AI that has been talked about since early last year. Moreover, TSMC’s accelerating revenue growth is the clearest evidence that the company can meet the challenge. It also suggests that TSMC could easily join the trillionaire league.
According to Wall Street, TSMC is expected to generate $87.38 billion in revenue in 2024, with a forward price-to-sales multiple (P/S) of roughly 9.5. Assuming the P/S remains constant, TSM would need to grow revenue to roughly $210 billion per year to support a $2 trillion market cap.
The company expects growth to be “slightly above the mid-20s” by 2024, and Wall Street already seems to agree, predicting revenue growth of 27% and 26% in 2024 and 2025, respectively. If the company can clear these relatively low benchmarks, it will likely achieve a $2 trillion market cap by early 2029. But given accelerating adoption of AI, it could cross that threshold even sooner.
Another catalyst for TSMC is the potential of AI-enabled smartphones, which could trigger an accelerated upgrade cycle, something that TSMC, as a leading provider of smartphone processors, would obviously benefit from.
Estimates of the continued adoption of AI suggest that the future is bright for TSMC. According to global management consulting firm McKinsey & Company, generative AI is expected to benefit the global economy by $2.6 trillion to $4.4 trillion annually over the next decade. Even this estimate may be conservative, as it continues to rise as new uses for AI are discovered.
Finally, TSMC’s valuation is attractive at 28 times earnings, offering investors an attractive way to capitalize on the paradigm shift that AI represents.
Danny Vena invests in Apple, Microsoft, and Nvidia. The Motley Fool invests in and recommends Advanced Micro Devices, Apple, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and recommends buying Microsoft January 2026 $395 calls and selling Microsoft January 2026 $405 calls. The Motley Fool has a disclosure policy.
