Taiwan Semiconductor Manufacturing: A Rising Star in AI Chip Stocks

Taiwan Semiconductor Manufacturing Company (TSMC) has seen its shares skyrocket over the past year, increasing more than 100% and landing the company in the prestigious trillion-dollar club. This remarkable surge underscores the company's pivotal role in the booming artificial intelligence (AI) sector.

As of mid-January 2023, TSMC stands among just ten publicly traded companies worldwide valued at over $1 trillion. Notably, all but Warren Buffett's Berkshire Hathaway are heavily involved in the AI revolution.

With a current share price hovering around $213, TSMC shares are nearing their 52-week high, joining other notable players like Nvidia in terms of market capitalization.

Potential for a Stock Split

The rapid valuation growth of TSMC, which has nearly doubled from about $500 billion to over $1 trillion in just one year, raises questions about a possible stock split. Stock splits generally lead to an increase in the number of outstanding shares; for instance, when Nvidia executed a 10-for-1 split, the share price was adjusted downward accordingly.

Such moves typically indicate a bullish outlook from management. When a company opts for a stock split, it can imply confidence that the stock will continue to appreciate, despite the challenges of having more shares to support a higher price.

Reasons to Maintain the Current Strategy

TSMC holds a unique position in the semiconductor industry as a leader in advanced manufacturing processes for chips used by various companies, including Nvidia, Advanced Micro Devices (AMD), and others.

Research suggests massive investments in AI infrastructure, projected to be worth trillions in the coming years. Specifically, the market for Graphics Processing Units (GPUs) is expected to reach around $300 billion by the end of the decade. With major companies like Microsoft, Amazon, Alphabet, and Meta Platforms ramping up chip production, TSMC is well-positioned to benefit from the AI boom.

Despite trading at over $200, some investors question whether TSMC shares are too costly. However, it is critical to assess valuation based on multiples rather than just share price. For example, while TSMC trades at around $200, Nvidia's market cap is almost three times larger, highlighting the necessity of comparing companies within context.

Investment Perspective on TSMC Stock

To determine the current valuation of TSMC, investors should consider the stock's forward price-to-earnings (P/E) ratio, which stands at approximately 23.4, closely aligned with the average for the S&P 500. This suggests that TSMC might offer similar upside potential as the broader market, which might make its current valuation less alarming.

Moreover, given the anticipated increase in AI capital expenditures in the upcoming years, there is a significant chance that TSMC will command a premium valuation compared to the S&P 500 in the future.

For these reasons, TSMC presents an attractive long-term investment opportunity, regardless of whether a stock split occurs in the near future.

TSMC, AI, Stocks