You can't talk about artificial intelligence or chip stocks without talking about Taiwan Semiconductor Manufacturing (TSM +2.69%), or TSMC as it's also known.
The company invented the pure-play foundry business model in 1987, meaning it manufactures chips only for other chip companies rather than its own designs, and it's the dominant player in that industry today. Its market share of contract chip manufacturing is estimated at around 60%, and it makes roughly 90% of advanced chips made by third-party manufacturers, which has given it a significant advantage in artificial intelligence (AI).
Among the companies that rely on TSMC to manufacture its chips are Apple, Nvidia, Broadcom, AMD, and others. In other words, TSMC is a crucial partner for many of the world's biggest and most important tech companies.
TSMC's valuation topped $1 trillion for the first time ever after it posted a strong third-quarter earnings report on Thursday. TSMC has been a great stock to own for much of its history, but can it help you a retire a millionaire? Let's take a closer look at what the stock has to offer investors today.
Image source: Getty Images.
TSMC's wide economic moat
With a trillion-dollar market cap and market share above 50% among contract manufacturers, TSMC enjoys significant competitive advantages in its industry, and those were on display in its recent earnings report.
TSMC reported an operating margin of 47.5% in the quarter, showing it kept nearly half of its revenue as profits before taxes. The company is able to do that because it competes in an industry with high barriers to entry, and it's formed close relationships with its customers. For example, it makes all of Nvidia's data center components, allowing it to share in the spoils in the AI boom.
Additionally, two of its closest competitors are struggling. Intel just announced a massive restructuring, and said it would make its foundry business a subsidiary, potentially setting it up to be sold. It's also cutting capital expenditures as it looks to save money and drive profitability.
Samsung, meanwhile, the world's No. 2 chip producer, apologized to its investors after reporting a weak quarter and problems in its memory business. With its competition flailing, TSMC is set up to gain more market share.
TSMC is growing rapidly
Semiconductors are a cyclical industry, but according to TSMC's latest results, the industry is booming. Revenue jumped 39% driven by a rebound in the smartphone business and strength in AI.
CEO C.C. Wei pushed back against concerns about an AI bubble, saying that AI demand is real and that TSMC communicates frequently with its customers on AI products. He also predicted that AI production would last for many years.
TSMC also gave strong guidance for the fourth quarter, calling for revenue of $26.1 billion to $26.9 billion, up 13% sequentially at the midpoint and 35% year over year. That was also well ahead of the analyst consensus.
With AI demand likely to provide a tailwind for years and rebound in other sectors, TSMC looks primed for superior growth in the years ahead.
NYSE: TSM
Key Data Points
A smart choice for your retirement portfolio
In addition to its competitive advantages and impressive growth, TSMC also trades at an affordable price-to-earnings ratio of 33, a reflection perhaps of the risk of being based in Taiwan and the cyclical nature of the semiconductor industry.
However, a moderate valuation and strong growth is generally a recipe for continued share price appreciation.
Even at a market cap of $1 trillion, the stock can still double or triple over the next five to 10 years, making it a smart addition to almost any portfolio. If you're aiming to retire as a millionaire, adding some TSMC stock to your portfolio looks like a no-brainer move to help you get there.
