The trillion-dollar market cap club is exclusive. As it stands, there are only seven companies in the world that have passed that mark. Apple, Microsoft, and Nvidia reign supreme, sitting in the illustrious $3 trillion club, but Alphabet is the lonely company in the $2 trillion club -- for now.
With a market cap of just over $880 billion, Taiwan Semiconductor Manufacturing (TSM +0.53%) (TSMC) still has a ways to go to reach $2 trillion, but the milestone is well within its reach. And it might not take too long, either.
Since it became listed on the New York stock exchange in October 1997, TSMC has averaged around 13.5% annual returns. In the past decade, it's been even more impressive, averaging over 23% annual returns. A lot of that can be attributed to the 61% it's up in the past 12 months, but even much more modest returns can get TSMC into the $2 trillion club.
NYSE: TSM
Key Data Points
It would take just over 8.5 years to go from a $880 billion market cap to a $2 trillion market cap, averaging 10% annual returns. With TSMC's growth prospects, I believe this is doable.
TSMC is an important player in the tech ecosystem
TSMC is the largest and most important semiconductor company in the world. It established the foundry model, where instead of making semiconductors for general sale, it makes semiconductors for a company's specific needs.
This model and the quality of TSMC's semiconductors have made it the go-to for some of the world's best companies, including Apple, Nvidia, and Tesla. Semiconductors are the foundation for many electronics and applications we use today. They're in iPhones, graphic processing units (GPUs), cars, and even medical devices.
You could make a strong case that without TSMC, many of these items and applications we enjoy would take a quality hit. This is why it's continued to be the top choice despite other companies like Intel embracing the same foundry model.
TSMC is on the early end of an AI-fueled revenue boost
For a while, TSMC's financial performance relied on its smartphone business, and that caused it to hit a rough spot as global smartphone sales slowed down. Smartphones will continue to be an important part of TSMC's business, but it's getting help from its high-performance computing (HPC) segment, which includes artificial intelligence (AI)-related revenue.
In the second quarter, TSMC's revenue grew nearly 33% year over year to $20.8 billion, with HPC accounting for 52% of it. This continues a trend that's taken place over the past few quarters:
| Quarter | Percentage of Revenue from HPU | Percentage of Revenue From Smartphones |
|---|---|---|
| Q2 2024 | 52% | 33% |
| Q1 2024 | 46% | 38% |
| Q4 2023 | 43% | 43% |
Data source: TSMC.
TSMC's semiconductors are important to the GPUs that power most data centers. Without these data centers, it'd be virtually impossible to store and transport the data needed to train the AI applications that have become prominent in the past couple of years. So, it all begins with TSMC's semiconductors.
The success of its second quarter caused TSMC to raise its full-year revenue guidance to right above the mid-20 percentage range. It also expects its capital expenditures to be between $30 billion and $32 billion after previously estimating it to be between $28 billion to $32 billion. This potential increase in investments will help better position it to handle the increased demand cause by the AI surge.
TSM Capital Expenditures (Annual) data by YCharts
TSMC's valuation makes it an attractive option
Despite surging over 57% this year, TSMC's stock is still valued at a reasonable level. Its forward price-to-earnings (P/E) ratio is around 20.5, well below the 23.7 P/E ratio it has averaged over the past five years.
TSM PE Ratio (Forward 1y) data by YCharts
TSMC could face some geopolitical headwinds, as it potentially gets caught up in U.S.-China trade tensions and export restrictions, but these are issues TSMC's CEO has reassured won't stop the company's growth and expansion plan.
Given expected growth from AI demand and additional revenue that could come from a rebound in the smartphone market (especially as Apple iPhone sales are expected to rebound with the addition of Apple Intelligence in its next generation models), there's reason to think TSMC can join the $2 trillion club within the next decade.
