Taiwan Semiconductor Manufacturing stands to benefit from booming demand in AI chips.
One of the biggest catalysts in the artificial intelligence (AI) movement is semiconductors. Highly specialized chips called graphics processing units (GPUs) are used for a variety of AI-powered applications including training large language models and autonomous driving.
Nvidia has emerged as the de facto leader in generative AI chips thanks to its A100, H100, and new Blackwell series GPUs. Since the beginning of the year, the company has added nearly $2 trillion in market cap — making it one of the most valuable businesses in the world.
Smart investors understand that when it comes to semiconductors, Nvidia isn’t the only lucrative opportunity.
One company that should be on your radar is Taiwan Semiconductor Manufacturing (TSM 1.54%).
About a week ago, Taiwan Semiconductor’s market cap briefly eclipsed the coveted $1 trillion milestone. However, shares have since retreated and as of this writing the company boasts a market cap of roughly $982 billion.
Let’s dig into how the company plays an important role in the development of semiconductors and assess why I see it as the next chip stock to sustain a trillion-dollar valuation.
An important role in the chip space
While businesses such as Nvidia, AMD, and Intel design leading chips used by some of the world’s largest AI companies, Taiwan Semiconductor plays a key role behind the scenes.
Many chip companies outsource manufacturing services. Taiwan Semiconductor’s fabrication facilities are where many leading chip designs actually come to life.
Per the company’s filings, Taiwan Semiconductor manufactures chips for Nvidia, AMD, Broadcom, Intel, Qualcomm, and many more.
Image source: Getty Images.
Why Taiwan Semiconductor’s growth may be just beginning
According to Precedence Research, the global AI chip market is expected to grow at a compound annual growth rate (CAGR) of 30% from 2023 to 2032 — ultimately reaching a size of $227 billion.
Many of the companies referenced above stand to benefit from this growth. However, I’d argue that Taiwan Semiconductor may be in the most lucrative position of all.
Competition among chip designers will likely continue to intensify in the coming years. Over time, it will be increasingly difficult for chip designers to gain market share as more products are introduced.
For example, Nvidia’s growth will likely eventually peak and its pricing power should begin to normalize as more chip designs enter the market. This means that Nvidia investors should be keenly monitoring the competition while also looking at the company’s growth rates across the top and bottom lines. Should Nvidia begin to show some deceleration, it could mean that competition is gaining momentum.
While this dynamic might make it difficult to discern investment opportunities among some of the chip stocks explored above, I think that Taiwan Semiconductor’s prospects look bright regardless.
Taiwan Semiconductor actually stands to benefit from rising competition as it theoretically leads to more demand for its fabrication and manufacturing services.
Is now a good time to buy Taiwan Semiconductor stock?
Considering Taiwan Semiconductor was already briefly valued at a $1 trillion, and its recent market cap was a stone’s throw away from the milestone, I think the bigger question is how the company can sustain a trillion-dollar valuation.
The table below illustrates a preview of Taiwan Semiconductor’s second-quarter revenue trends:
| Category | Q2 Management Forecast (Midpoint) | Q2 Revenue | Difference |
|---|---|---|---|
| Revenue | $20 billion | $20.9 billion | $0.9 billion |
Data source: Taiwan Semiconductor Investor Relations.
While management had initially forecast second-quarter revenue to be in the range of $19.6 billion to $20.4 billion, the company’s monthly flash reports indicate that second quarter revenue actually came in nearly $1 billion ahead of guidance.
Although this is encouraging, investors should be on the lookout for trends in Taiwan Semiconductor’s gross margin and cash flow. While overachieving its sales goals is nice to see, it’s also not entirely surprising given how much demand there is for AI chips.
The path to achieving and sustaining a trillion-dollar valuation should be reached if Taiwan Semiconductor can prove that it can fulfill its customer demand while also compounding its earnings power.
In other words, if the company accelerates both revenue and profits, investors likely will come to see that Taiwan Semiconductor is building just as strong a business as its cohorts and deserves a premium valuation.
Given the long-term secular trends fueling the AI chip space combined with Taiwan Semiconductor’s unique position in the chip realm, I think the growth narrative is just beginning. Now looks like a great time to scoop up some shares as a position in the trillion-dollar club looks within reach.
Adam Spatacco has positions in Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and Intel and recommends the following options: long January 2025 $45 calls on Intel and short August 2024 $35 calls on Intel. The Motley Fool has a disclosure policy.