TSMC Surpasses $1 Trillion Market Cap: The Future Ahead

The semiconductor industry is witnessing a significant milestone as Taiwan Semiconductor Manufacturing (TSMC) has just surpassed a market cap of $1 trillion, joining a select group of companies on the global stage. This achievement comes on the back of remarkable financial growth reported for the third quarter of the year, marking TSMC as the ninth company globally, excluding state-owned enterprises, to reach this impressive valuation.

Riding the wave of increased spending on artificial intelligence (AI) computer chips, TSMC is enhancing its dominance in the semiconductor foundry market and showing no signs of a slowdown. As the company continues to innovate and expand, stakeholders are curious about what the future holds for this tech giant.

Growth in High-Performance Computing

TSMC stands out as the only manufacturer globally capable of producing ultra-fast computer chips utilizing the smallest transistor technology. The company’s advanced 3-nanometer and 5-nanometer nodes accounted for approximately half of its revenue in the last quarter, underlining the high market demand and prices for these products. Due to this burgeoning demand, TSMC is projecting a remarkable 30% revenue growth in U.S. dollars for 2024.

Examining the details of the high-performance computing (HPC) segment, which includes spending for AI chips, reveals significant growth. In the third quarter of 2023, revenue from HPC chips constituted 51% of TSMC's total revenue, up from 42% the previous year. This translates to an impressive $12 billion in HPC revenue last quarter, which is a striking increase from $7.26 billion in 2022, representing about 65% year-over-year growth. Such figures reflect the capacity of TSMC to thrive even at its current substantial scale.

Forward-thinking management expects this growth to continue through 2025, armed with plans for substantial capital expenditures aimed at new factory development to meet future demands. TSMC intends to allocate around $30 billion for capital expenditures in 2024, gearing up for revenue expansions in subsequent years, contingent on the successful operation of these new facilities.

Geographic Expansion on the Horizon

An upcoming strategic shift for TSMC involves diversifying operations beyond its home base in Taiwan. Both the company and its suppliers aim to mitigate risks associated with Taiwan potentially becoming a semiconductor supply chokepoint due to geopolitical tensions, particularly with China's military discourse concerning the island.

To address these risks, TSMC is in the midst of constructing new factories in Arizona, with the first facility expected to begin high-volume production in early 2025. This site will focus on advanced process nodes, essential for the critical HPC segment. Additionally, two more facilities are expected to come online by the end of the decade.

Efforts to reduce geographical concentration also extend to Japan and Europe, with TSMC investing potentially over $100 billion in new manufacturing facilities outside of Taiwan in the next five to ten years. Observing these developments is crucial for investors, as the success of these expansions will be essential in managing geopolitical risks while determining if similar profit margins can be achieved away from Taiwan.

What Lies Beyond the $1 Trillion Mark?

TSMC's financial outlook appears robust, underscoring its readiness for continued growth. The company reported a 36% increase in net revenue year over year in U.S. dollar terms, with operating margins climbing to 47.5%. The net income also saw substantial growth, surging by 54.2% in the same quarter. While sustaining earnings growth at such extraordinary rates may not be feasible indefinitely, it is reasonable to expect TSMC to maintain double-digit growth in net income annually over the next five years, primarily driven by the AI surge.

However, the question remains: is TSMC stock a worthwhile investment? The stock has shown a remarkable climb of 170% since the beginning of 2023, placing its current price-to-earnings (P/E) ratio at over 30, significantly above that of the S&P 500 index average. While TSMC indeed excels compared to the average business and is set to outpace standard growth rates, the stock's high P/E ratio raises concerns about potential adjustments and a return to historical norms.

Investors should consider the recent achievement of TSMC crossing the trillion-dollar threshold as a noteworthy milestone. In the next five years, it is likely that the company’s market cap will continue to grow; however, the current stock price may not represent a compelling opportunity after its extraordinary surge in value.

TSMC, AI, Growth