Semiconductors are a key enabler of the artificial intelligence (AI) revolution, and this company holds the keys to the kingdom.
Artificial intelligence (AI) has been all the rage in recent years, and its adoption is increasing at a dramatic pace. This has accelerated the sales, profits, and resulting market capitalization of the world’s most famous companies. In fact, six of the seven most valuable companies in the world come from the Magnificent Seven, a group of companies with an inextricable connection to AI.
At the top of the list are four of the world’s leading developers of AI-centric technologies. Apple topped the list with $3.4 trillion. Nvidia, Microsoft, and Alphabet round out the quartet, with market values of $3.2 trillion, $3 trillion, and $2.16 trillion, respectively.
With a market capitalization of around $977 billion (as of this writing), it may seem a little premature to predict Taiwan Semiconductor Manufacturing’s market size. (TSM 1.26%)The company, often referred to as TSMC, which will soon receive membership in this special fraternity, has all the trappings of success. As the adoption of AI continues to expand, the demand for cutting-edge semiconductors that power these sophisticated algorithms is exploding. TSMC, the world’s largest foundry, is the world’s largest provider of these next-generation processors, so its entry into this prestigious club seems inevitable.
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side of chips
TSMC has been a leading provider of semiconductors for more than 30 years, but with the advent of AI, it has faded from the shadows.
Management describes TSMC as “the world’s largest and best semiconductor foundry,” which explains why the company is playing a key role in accelerating AI adoption. These systems require cutting-edge semiconductors, and TSMC is in pole position. The company’s customer list includes industry leaders such as Nvidia, Arm Holdings, Advanced Micro Devices, Broadcom, and Apple, which helps explain its benefits.
Additionally, while processors used in smartphones once made up the majority of the company’s wealth, high performance computing (HPC) and AI now account for 51% of TSMC’s revenue.
The results are enlightening. Third-quarter sales increased 36% year over year to $23.5 billion, and earnings per share (EPS) increased 54% to $1.94. Management expects the company’s impressive growth to continue, with fourth-quarter sales of $26.5 billion, or approximately 35% growth, at the midpoint of guidance. That prediction may be conservative. The company reported a 40% year-over-year increase in sales in September, which was well above management’s guidance.
Finally, TSMC manufactures an estimated 90% of the world’s most advanced semiconductors, which will continue to drive the company’s AI-centric growth.
The road to $1 trillion
TSMC, the world’s largest semiconductor foundry, plays a key role in advancing AI. The company’s technological advantages in manufacturing the world’s most sought-after AI processors are unmatched by any of its competitors. Additionally, the company’s accelerating revenue growth helps highlight upcoming opportunities. It also suggests that TSMC will join the ranks of billionaires.
According to Wall Street, TSMC is expected to generate revenue of $89.41 billion in 2024, with a projected price-to-sales (P/S) ratio of approximately 10.9. Assuming a constant P/S, TSMC would need to increase its sales to about $183 billion annually to support its $2 trillion market cap.
The company’s outlook suggests full-year growth of about 29% in 2024, and Wall Street agrees, with analysts pegging earnings of 29% and 26% in 2024 and 2025, respectively. We expect growth. If the company clears these hurdles, it will likely reach a market cap of $2 trillion by early 2028. But the rapid rise in AI adoption suggests it could happen even sooner. Additionally, the continued recovery in the smartphone industry will also benefit TSMC.
Generative AI is expected to add $2.6 trillion to $4.4 trillion annually to the global economy over the next decade, according to global management consulting firm McKinsey & Company. But estimates of AI’s impact continue to rise as new use cases emerge.
Finally, TSMC’s price-to-earnings ratio of 30x makes it attractively priced, especially considering the ongoing opportunity.
Alphabet executive Suzanne Frye is a member of The Motley Fool’s board of directors. Danny Vena has held positions at 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 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.
