Taiwan Semiconductor Manufacturing Surpasses $1 Trillion Market Cap: What's Next?

Taiwan Semiconductor Manufacturing (TSMC) has reached a significant milestone, surpassing a market cap of $1 trillion following impressive growth in its recent quarterly performance. It is now the ninth company globally, excluding state-owned enterprises, to achieve this remarkable valuation.

TSMC is benefitting directly from increased investments in artificial intelligence (AI) chips, solidifying its leadership position in the semiconductor foundry market. This growth trend shows no signs of slowing, and many are eager to see what lies ahead for the company.

Strong Growth in High-Performance Computing

As the sole manufacturer of ultrafast computer chips with the tiniest transistors, TSMC is in a unique position. In the third quarter, its 3- and 5-nanometer chips accounted for approximately half of its overall revenue. This indicates not just high prices but also a booming demand from tech companies for these advanced chips. Consequently, TSMC is predicting a revenue growth of 30% in U.S. dollar terms for 2024.

Focusing on the high-performance compute (HPC) sector, which includes AI-related chips, TSMC has seen significant revenue growth. In Q3 2024, HPC segments brought in $12 billion, making up 51% of TSMC's total revenue, a rise from 42% in the same quarter the previous year. This impressive growth showcases a 65% increase year-over-year, reflecting the company's ability to expand even at its large scale.

The management team is optimistic about maintaining this growth trajectory, projecting continued expansion into 2025. Investments in new factories are a priority, with capital expenditures set to reach $30 billion in 2024. These developments are expected to drive additional revenue in 2025 and 2026, provided the new factories meet anticipated demands.

Diversification Beyond Taiwan

As TSMC looks ahead, a notable transformation will be its efforts to diversify operations beyond its home base in Taiwan. This shift is driven by concerns over geopolitical risks, especially in light of tensions from the Chinese government regarding Taiwan.

Progress is already being made, with three new fabrication facilities under construction in Arizona. The first of these is set to start high-volume production in early 2025, equipped with advanced technology to meet HPC demands. The second and third facilities are anticipated to be completed by the end of the decade.

Additionally, TSMC is expanding its footprint with factories in Japan and Europe as part of its diversification strategy. Management expects to invest tens of billions—potentially totaling over $100 billion—on facilities outside Taiwan in the next five to ten years. These efforts will be crucial in mitigating geopolitical risks and testing if profit margins can be maintained outside Taiwan.

What Lies Ahead After Reaching $1 Trillion?

TSMC's financial outlook appears strong, supported by a 36% increase in net revenue year-over-year, alongside expanding operating margins and a 54.2% rise in net income last quarter. While rapid earnings growth may not continue indefinitely, it is reasonable to expect that TSMC can sustain double-digit income growth on average for the next five years, largely fueled by the AI trend.

However, potential investors might be cautious. TSMC stock has surged 170% since the beginning of 2023, pushing its price-to-earnings (P/E) ratio well above 30, exceeding the average ratios of the S&P 500 index. Although TSMC is likely to outpace most market averages in terms of growth, its stock is currently trading at one of its highest valuations in history, raising concerns about potential corrections to more normalized levels.

Investors may find TSMC an attractive prospect following its million-dollar market value achievement, and it is likely that in five years, its market cap will exceed today's figures. Nonetheless, it may not be an immediate "must-have" stock given the recent price surge.

TSMC, Market, Growth