3 Things Smart Investors Know About Taiwan Semiconductor

Independent chipmaker Taiwan Semiconductor Manufacturing (TSM 1.26%) is one of the largest companies in the world, measured by market value.

With a market cap of $478 billion, it towers over sector peers and customers such as Intel (INTC -9.20%), Advanced Micro Devices (AMD 2.37%), and Texas Instruments (TXN 1.27%). The market footprints of the industry giants I just listed range from $147 billion (Intel) to $190 billion (AMD). Only Nvidia (NVDA 6.18%) comes with a larger total value than TSMC, nearly reaching $1.2 trillion thanks to this year's dramatic artificial intelligence (AI) boom.

That's one basic fact about the company also known as TSMC. But if you're thinking about investing in this stock, you should know much more than that. Read on to see three essential facts for well-informed investors.

1. It's impossible to pin a dollar value on AI for TSMC, but it's a big one

In Taiwan Semiconductor's first-quarter earnings call, CEO C.C. Wei danced around the topic of direct financial benefits from the explosive interest in AI systems.

"The trend is very positive for TSMC, but today, if you ask me to quantitatively say how much the amount will increase or what is the dollar content in the server, it's too early to say," Wei said.

The ChatGPT generative AI service was trained on tens of thousands of CPUs and GPUs with 175 petabytes (175 million gigabytes) of memory. Running the resulting large language model also requires thousands of chips and massive memory reserves.

These days, many tech giants are building tools and systems of their own, inspired by ChatGPT and similar generative AI products. This game-changing phenomenon is too new to make firm forecasts about its financial market effects, so TSMC hasn't baked it into its long-term growth and margin projections quite yet.

In other words, TSMC's business prospects may very well be brighter than management is willing to admit at this point. The stated goal of delivering annual revenue growth in the 15% to 20% range could be too conservative.

2. The company makes massive infrastructure investments

With or without a firm understanding of how much gasoline the AI boom is pouring into its fuel tanks, the company is preparing to make more chips than ever in the coming years. Its capital expenses tell the story of breathtaking investments in chipbuilding infrastructure.

In 2019, TSMC funneled 39% of its incoming revenue into capital expenses. Today, that ratio has expanded to 50% on a trailing basis:

TSM revenue (TTM) data by YCharts. TTM = trailing 12 months.

The downside to these ambitious upgrades is that the company could be left with oodles of unused manufacturing capacity if another downturn comes along over the next few years. But a company that always plans for the worst will miss every positive market development and fall behind its hungrier rivals over time.

That's not TSMC -- not now, and not over the market-defining history that took it this far. This company prepares to take advantage of economic upswings and soaring semiconductor demand.

3. TSMC is a semiconductor bargain right now

Many leading semiconductor companies trade at nosebleed valuations in this AI-flavored era. TSMC stands out with a downright affordable set of valuation metrics. Let me go back to the list of fellow chip giants I introduced earlier, to compare and contrast their affordability to TSMC's deeply discounted stock:

Data taken from Finviz.com after the market close on July 19, 2023.

TSMC isn't the only bargain-bin find here; Intel has also fallen out of Wall Street's favor recently and is not riding the AI bandwagon as effectively as Nvidia or AMD.

Other than that, TSMC's perfectly reasonable value-stock valuation ratios stick out from this pack in a good way. This stock has only gained 11% year to date while AMD nearly doubled and Nvidia more than tripled over the same period.

So if you're looking for a robust semiconductor stock with a tight connection to the AI market, all packaged with a reasonable stock price, it's hard to beat TSMC right now.