Nvidia (NASDAQ: NVDA) ascended to the exalted $1 trillion echelons in May 2023 propelled by the flourishing artificial intelligence market. Since then, the chip giant’s value has magnified over threefold, firmly securing its stance as the world’s second most valuable firm, trailing only Apple.
The illustrious $1 trillion club accommodates Nvidia’s prime clienteles, the “hyperscalers,” erecting colossal data centers for crafting and steering generative AI. Yet, a fresh inductee into this elite consortium happens to be a pivotal cog in Nvidia’s supply chain. This semiconductor entity is deeply entrenched in collaborations with almost every tech titan in the trillion-dollar cohort, and now, it, too, has claimed its place among the elite.
The latest AI chip incumbent in the $1 trillion fraternity is none other than Taiwan Semiconductor Manufacturing Company (NYSE: TSM). The narrative of TSM’s inexorable climb towards mega-cap eminence seems far from finding closure at the $1 trillion milestone.
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Unrivaled Excellence in Technology
Taiwan Semiconductor, or TSMC, operates as a premier chip manufacturer, esteemed as a foundry or fab by industry cognoscenti. Garnering over 60% of industry expenditure, TSMC stands as the favored choice for umpteen chip designers, and rightly so. Deemed by many as a technological vanguard, TSMC outstrips nearly every competitor by a substantial margin.
Recent financial results for the third quarter validate this technological supremacy. Marking a 39% year-over-year upsurge in revenue, TSMC witnessed an expansion in gross margin from 54.3% to 57.8% compared to the previous year, culminating in a 54.2% rise in net income. TSMC’s technological edge is the primary propeller behind these stellar outcomes, cementing its position as the go-to collaborator for fabricating advanced chips for AI, such as Nvidia’s GPUs, or smartphones, like Apple’s iPhones.
As elucidated by Nvidia CEO Jensen Huang at an investor conference, “We’re fabbing out of TSMC because it’s the world’s best. And it’s the world’s best not by a small margin, it’s the world’s best by an incredible margin.”
Fortunes in AI Yet to Unfold
Management anticipates a more than threefold surge in revenue from AI chips in 2024, although this segment is projected to constitute a mid-teen portion of TSMC’s total revenue for the year. The realm of AI presents a vast playing field for TSMC, which is proactively investing to harness the accompanying prospects.
While TSMC partners with Nvidia for chip production, the cutting-edge technology of the leading foundry is leveraged not only by Nvidia but also by other AI chipmakers. Giants like Microsoft, Alphabet, Meta, Broadcom, and Advanced Micro Devices are engrossed in engagements with TSMC for developing AI accelerator chips. Apple has long tapped into TSMC’s prowess for fabricating chips for its iPhone, iPad, and more recently, the Mac.
Irrespective of the evolutionary path of AI data centers, large language model training, or AI inference, TSMC appears poised to emerge as a significant victor.
Management has amped up its capital expenditure projections for 2024 to surpass $30 billion and envisages even higher investments in 2025. Concurrently, investments in research and development have escalated by 11.4% year over year in the last quarter.
The twin pillars of higher machinery and technology spending coupled with a relentless march towards technological innovation have underpinned TSMC’s perpetual triumph. Asserting its hegemony as the world’s foremost foundry, TSMC stands out for its ability to outspend competitors, thereby fostering technological supremacy and fortifying enduring relationships with premier global clients. This virtuous cycle confers upon TSMC an impregnable competitive edge.
The Ascension Beyond $1 Trillion
Despite a doubling of TSMC’s shares in 2024, there looms ample headroom for the stock to scale greater heights.
At prevailing share prices, TSMC trades slightly above 25 times analysts’ estimates for 2025 earnings, preceding any revisions based on the latest corporate results and management guidance. Over the ensuing five years, TSMC holds the potential to augment its bottom line by approximately 20%. This growth trajectory more than justifies the prevailing earnings multiple.
TSMC’s allure lies in its imperviousness to prospective industry shifts. Regardless of the chip designers steering data center and smartphone chip requirements, TSMC is primed to capture a lion’s share of this market, thanks to the aforementioned virtuous cycle. With management exhibiting stellar execution amidst the AI boom of recent years, the horizon looks radiant for the newest inductee into the $1 trillion stratum.
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