The $1 trillion figure may just be a milestone in the company’s continued growth amid the AI boom.
Nvidia (NVDA 0.78%) jumped into the $1 trillion club in May 2023, capitalizing on increased spending on artificial intelligence. Since then, the chipmaker’s value has more than tripled, making it the second most valuable company in the world after Apple.
The rest of the $1 trillion club is home to some of Nvidia’s biggest customers: “hyperscalers” who build massive data centers to train and run generative AI. But the newest member of the club is actually a key part of Nvidia’s supply chain. However, it’s not just Nvidia. The semiconductor company works closely with nearly every technology company in the trillion-dollar club, and now it’s finally becoming a member itself.
The latest artificial intelligence (AI) chip stock in the trillion-dollar club is Taiwan Semiconductor Manufacturing Company (TSM -2.46%). That’s why $1 trillion is just a milestone in the stock’s continued rise into the mega-cap ranks.
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“The best in the world by an unbelievable margin”
Taiwan Semiconductor Corporation (TSMC), also known as a foundry or fab, is a chip manufacturer. It is the top choice for many chip designers and attracts more than 60% of industry spending. There’s a good reason for that. TSMC’s technology is far more advanced than nearly all of its competitors’ technology.
“We’re displacing TSMC because TSMC is the best in the world,” NVIDIA CEO Jensen Huang said at an investor conference last month. It’s the best in the world,” he said.
This is evidenced by TSMC’s recent third quarter financial results. The company reported a 39% year-over-year revenue increase. Gross profit margin expanded to 57.8% from 54.3% in the previous year, resulting in a 54.2% increase in net profit. The driving force behind these impressive achievements is TSMC’s technology leadership. That makes it an essential partner for anyone looking to print advanced chips for AI (such as Nvidia’s GPUs) or smartphones (such as Apple’s iPhone).
“Our business in the third quarter was driven by strong smartphone and AI-related demand for our industry-leading 3nm and 5nm technologies,” CFO Wendell Huang said in an earnings release.
The AI story may have just begun.
Management expects revenue from AI chips to more than triple in 2024, but the division will only account for mid-teens of TSMC’s total for the year. TSMC has a long way to go to grow in the AI space, and the company is investing to take advantage of the opportunities presented.
Nvidia is working with TSMC to print its chips, but it’s not the only AI chipmaker taking advantage of the big factory’s advanced technology. Microsoft, Alphabet, Meta, Broadcom, and Advanced Micro Devices all contract with TSMC to develop AI accelerator chips. Apple has used TSMC for years to develop chips for the iPhone, iPad, and more recently the Mac.
In other words, no matter how the future of AI data centers, large-scale language model training, and AI inference unfolds, TSMC stands to be a big winner.
Management has raised its 2024 capital spending forecast to more than $30 billion and expects to invest even more in 2025. The company also spends on research and development, which rose 11.4% year-on-year in the previous quarter.
Both are key to TSMC’s continued success. As the largest foundry in the world by far, we are able to invest more in machinery and technology while increasing our technical capabilities over other competitors. This allows us to maintain our position as a technology leader and, in turn, leads to continued relationships with the world’s largest customers. This virtuous cycle is a major competitive advantage that is difficult for TSMC to overcome.
$1 trillion may be just the beginning
TSMC stock has more than doubled in 2024, but there is still room for the stock to rise further.
At its current price, the company trades at just over 25 times analysts’ estimates for 2025 earnings. And that’s before you have a chance to update your model with the latest results and guidance from management. Over the next five years, TSMC can grow its revenue at a rate in the 20% range. Spending on AI remains strong, and strong leverage has allowed the company to maintain strong gross margins even as it brings next-generation technology online. This level of growth fully justifies the current earnings multiple.
The most attractive thing about the company is that it is protected from future industry changes. Regardless of who designs the chips needed for data centers and smartphones, the virtuous cycle described above will ensure that TSMC gets the lion’s share of that business. Amid the AI boom, the future remains bright for the newest members of the $1 trillion club, given the strong performance of management teams over the past few years.
Suzanne Frey, an Alphabet executive, is a member of the Motley Fool’s board of directors. Randi Zuckerberg is a former head of market development and spokesperson at Facebook, sister of Meta Platforms CEO Mark Zuckerberg, and a member of the Motley Fool’s board of directors. Adam Levy has worked at Alphabet, Apple, Meta Platforms, Microsoft, and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in 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: A long January 2026 $395 call on Microsoft and a short January 2026 $405 call on Microsoft. The Motley Fool has a disclosure policy.
