TSMC Surpasses $1 Trillion Market Cap: The Future Ahead

Taiwan Semiconductor Manufacturing Company (TSMC) has accomplished a significant milestone by surpassing a market cap of $1 trillion. This achievement comes on the back of impressive growth reported for the third quarter. Excluding state-owned enterprises, TSMC is now among only nine companies worldwide that have reached this valuation.

The company has seen direct benefits from the increasing investments in artificial intelligence (AI) chips, solidifying its position as the leader in the semiconductor foundry market. This article explores what the future may hold for TSMC.

Growth in High-Performance Computing

One of TSMC's key advantages is its unique ability to manufacture high-speed computer chips using the tiniest transistors. The company's 3-nanometer and 5-nanometer manufacturing nodes accounted for nearly half of its revenue in the recent quarter, indicating strong demand and high pricing for these advanced chips. TSMC projects a 30% revenue growth in U.S. dollar terms for 2024, driven largely by this high-performance computing (HPC) segment, which includes AI-related chip spending.

Looking closer at the HPC segment, it made up 51% of TSMC's total revenue in Q3 2024. This is an increase from 42% the previous year, translating to a remarkable $12 billion in HPC revenue for the quarter compared to $7.26 billion in Q3 2023, representing growth of around 65% year over year. Such growth rates are exceptional for a company of TSMC's size.

Going forward, TSMC anticipates continued growth through 2025 and beyond. To prepare for this demand, the company plans to invest $30 billion in capital expenditures in 2024. This investment will likely result in revenue growth in 2025 and 2026, provided that the new factories are effective in production.

Geographic Expansion Strategies

In the coming years, TSMC aims to diversify its manufacturing locations beyond Taiwan. This move is crucial to mitigate supply chain risks associated with geopolitical tensions, particularly concerning China’s stance towards Taiwan.

Construction of new factories is already underway, including three facilities in Arizona, with substantial production expected to begin in early 2025 at the first site. These factories will feature advanced process nodes to cater to the HPC market. The second and third facilities are projected to be operational by the end of the decade.

Furthermore, TSMC has plans for additional facilities in Japan and Europe. The management is considering spending tens of billions, possibly over $100 billion, on expanding manufacturing capabilities outside Taiwan within the next five to ten years. This diversification is crucial not only for reducing geopolitical risk but also for exploring whether the currently high profit margins can be sustained in new locations.

What Lies Ahead After the $1 Trillion Milestone?

With its solid financial performance, TSMC appears well-positioned for sustained growth in the foreseeable future. The company's net revenue saw a 36% increase year over year in the last quarter, with an impressive operating margin of 47.5%. Consequently, net income jumped by 54.2% during the same period. Although TSMC may not sustain a 50% earnings growth rate indefinitely, it is reasonable to expect double-digit net income growth annually for the next five years, primarily due to the AI chip demand.

However, the question remains: is TSMC stock a good investment now? Its stock price has surged by 170% since the start of 2023, with a price-to-earnings (P/E) ratio exceeding 30, higher than the average for the S&P 500 index. While TSMC is indeed a stronger business than many on the index and should experience faster earnings growth, the current valuation suggests that the stock could be vulnerable to a decline in P/E ratios.

Investing in TSMC after it crossed the $1 trillion mark is justifiable. Over the next five years, it is likely that the company's market cap will continue to grow. However, potential investors should be cautious, as the stock may not represent a guaranteed opportunity after the significant price increase witnessed over the past two years.

TSMC, Growth, Investment