Taiwan Semiconductor Manufacturing: A Trillion-Dollar Chip Stock Surge and Potential Stock Split

Over the past year, shares of Taiwan Semiconductor Manufacturing (TSMC) have increased by more than 100%, joining the elite group of companies with a market valuation exceeding $1 trillion.

As of January 17, there are only 10 public companies worldwide that boast a valuation of at least $1 trillion. Most of these companies, excluding Berkshire Hathaway, are at the forefront of the ongoing artificial intelligence (AI) revolution.

TSMC's impressive performance mirrors that of another major player, Nvidia, placing both firms in the trillion-dollar club. With TSMC shares currently priced around $213, the stock is trading close to its 52-week high.

This article delves into the possibility of TSMC considering a stock split and the implications it may have for investors.

Reasons TSMC Might Consider a Stock Split

The impressive market cap growth of TSMC is evident, with the company's valuation nearly doubling from approximately $500 billion to over $1 trillion in just a year. Given such significant valuation growth in such a short period, a stock split might be a sensible consideration.

When a company splits its stock, it increases the number of outstanding shares. For instance, when Nvidia executed a 10-for-1 stock split recently, it resulted in a tenfold increase in the number of shares while simultaneously reducing the share price by the same proportion. It’s important to note that stock splits have no effect on a company’s overall valuation.

With more outstanding shares post-split, it requires a greater amount of buying activity to see an increase in stock price. This can be interpreted as a signal that management is confident in the company’s future growth. Opting for a stock split may suggest that TSMC’s management anticipates continued stock price growth, while also presenting a challenge to unlock further gains due to the larger number of shares.

Why TSMC May Choose to Maintain the Status Quo

TSMC occupies a unique and critical position in the semiconductor industry, specializing in cutting-edge manufacturing processes that support the needs of well-known clients like Advanced Micro Devices and others.

Industry studies indicate that investments in AI infrastructure are projected to reach trillions of dollars for the foreseeable future. In particular, the market for graphics processing units (GPUs) is expected to be worth nearly $300 billion by the end of the decade. With major companies such as Microsoft, Amazon, Alphabet, and Meta Platforms introducing more chip technology into the market, TSMC is poised to benefit significantly from the growing demand driven by AI technologies.

However, as shares rise above $200 each, investors may start to wonder if TSMC's stock is becoming too expensive. It’s essential to recognize that evaluating a stock's value solely based on its price can be misleading. While TSMC's share price is around $200 and Nvidia’s is about $140, Nvidia’s market cap is $3.4 trillion—almost triple that of TSMC.

Is TSMC Stock a Good Investment Right Now?

To determine if TSMC is a sound investment, it is crucial to examine its valuation multiples. Currently, TSMC has a forward price-to-earnings (P/E) ratio of around 23.4, which closely aligns with the average P/E ratio for the S&P 500. This suggests that investors perceive the potential for TSMC to yield returns similar to the broader market.

Given TSMC’s soaring valuation and high stock price, perceptions of overvaluation begin to diminish when framed in this context. Considering the anticipated growth in AI capital expenditure over the next few years, it seems probable that TSMC shares could attain a substantial premium over the S&P 500 in the future.

For these reasons, TSMC appears to be a valuable long-term investment opportunity, regardless of whether the company opts for a stock split or not.

stocks, valuation, AI