Taiwan Semiconductor Manufacturing: A Trillion-Dollar Chip Stock on the Rise

Over the past year, shares of Taiwan Semiconductor Manufacturing (TSMC) have seen an incredible surge, climbing over 100%. This remarkable growth has elevated TSMC into the exclusive trillion-dollar club.

As of January 17, there are only 10 publicly traded companies worldwide with valuations exceeding $1 trillion. Except for Berkshire Hathaway, all these trillion-dollar corporations are at the forefront of the ongoing artificial intelligence (AI) revolution.

Having increased by 110% in the last year, TSMC now shares this elite status with major players like Nvidia. With shares currently priced at $213, TSMC approaches its 52-week high.

In this article, we will delve into why TSMC might consider a stock split soon, as well as the potential implications for investors.

Reasons for TSMC Considering a Stock Split

Looking at TSMC's market cap over the last year shows that the company's valuation has nearly doubled, jumping from about $500 billion to over $1 trillion. Such a significant increase in valuation within a short period could justify the consideration of a stock split.

When a company executes a stock split, it increases the number of outstanding shares. For example, Nvidia's recently completed 10-for-1 stock split raised its outstanding shares tenfold while proportionately lowering its share price. Importantly, this process does not alter the company’s overall valuation.

With a higher number of shares available, it requires more purchasing activity to boost the stock price further. Hence, a stock split can often signal that the management remains bullish and confident about the company’s future growth. By considering a stock split, TSMC's management may signal their belief that stock prices will continue to rise, even if the higher share count makes it more challenging to see significant increases.

Potential for TSMC to Maintain Current Approach

TSMC holds a unique position in the semiconductor industry. It is known for its advanced manufacturing processes that turn chips from clients like Advanced Micro Devices, Nvidia, and others into reality.

Industry analysts suggest that investment in AI infrastructure will reach trillions of dollars over the coming years. Specifically, the market for graphics processing units (GPUs) is projected to be nearly worth $300 billion by the end of the decade. With numerous tech giants, including Microsoft, Amazon, Alphabet, and Meta Platforms, introducing more chip technology, TSMC should benefit from these AI trends for many years ahead.

But with shares exceeding $200, is TSMC becoming too expensive? Not necessarily.

Evaluating valuation solely on share price can be misleading. For instance, while TSMC’s stock sits at $200, Nvidia's stock is at $140 — however, Nvidia's market cap is $3.4 trillion, nearly three times that of TSMC.

Is TSMC Stock a Good Investment Now?

To assess if TSMC stock is overvalued, one must look at valuation multiples. Currently, TSMC’s forward price-to-earnings (P/E) ratio stands at 23.4, which is comparable to the average forward P/E ratio for the S&P 500.

These ratios suggest that investors are viewing TSMC as having similar potential for growth as the overall market. Given this perspective, TSMC’s soaring valuation and relatively high share price may not seem so exorbitant. Moreover, considering the rising investments in AI-related capital expenditures in the coming years, it’s plausible that TSMC's shares will gain a notable premium compared to the S&P 500.

For all these reasons, TSMC presents an enticing opportunity to buy and hold for the long term, regardless of whether a stock split occurs.

TSMC, AI, StockSplit