Many investors know the "Magnificent Seven" tech companies that are powering the boom in artificial intelligence (AI) spending. But there is another company that supplies the majority of computer chips to the AI industry.
That company is Taiwan Semiconductor Manufacturing (TSM +6.75%), or TSMC for short. It has built up a dominant position in manufacturing advanced computer chips for virtually all the Magnificent Seven and now has a market cap of $1.5 trillion.
But shares may still be underrated by Wall Street. Here's why TSMC could double its market cap over the next two years and be worth $3 trillion by 2027 riding the back of AI infrastructure spending.
The supplier of the entire AI revolution
Data center builders plan to spend trillions of dollars over the next few years on AI. Much of this will go to chipmakers like Nvidia. However, Nvidia does not actually manufacture its own chips; TSMC does.
This gives TSMC a dominant position in the AI supply chain. It is one of the few companies -- if not the only one -- able to produce the most advanced computer chips for all sorts of AI customers, giving it close to a monopoly in the semiconductor foundry space.
This is why the company has grown its revenue by 335% in the last 10 years to $116 billion. Given its near monopoly, the chip manufacturer has abundant pricing power. Last quarter, TSMC posted an operating margin of over 50%, which is unheard of for a manufacturing business.
NYSE: TSM
Key Data Points
As AI spending grows, so will the need for semiconductor capacity from TSMC. This should enable it to keep increasing revenue rapidly -- 41% year over year last quarter -- and perhaps eclipse $200 billion in sales in 2027. With a 50% operating margin, that would equate to $100 billion in bottom-line operating earnings.
Image source: Taiwan Semiconductor Manufacturing.
Betting on America and reinvesting for growth
Taiwan is the hub of semiconductor manufacturing, but given the country's geopolitical risk due to its relationship with China, TSMC and the U.S. government -- along with TSMC customers such as Apple and Nvidia -- have made a big push to build semiconductor factories in the U.S.
TSMC is expecting to have $165 billion in capital expenditures in the U.S. for advanced manufacturing plants, centered in Arizona. The company would make such an investment only if it knows it will directly lead to growth, which should show that it believes it can keep up its impressive pace of AI deployments.
Sam Altman, CEO of OpenAI, has said that he wants Taiwan Semiconductor to increase its manufacturing capacity as quickly as possible. Even though TSMC's revenue is growing at 40% year over year, its pace of adding semiconductor supply is still well below overall market demand.
TSM PE Ratio data by YCharts; PE = price to earnings.
Can TSMC achieve a $3 trillion market cap?
Unlike most Magnificent Seven stocks, TSMC trades at a reasonable valuation with a price-to-earnings ratio (P/E) of 31. This figure should come down quickly as the company keeps scaling up its manufacturing in both Taiwan and the U.S.
If TSMC can grow its revenue at 40% for the next two years, it will have around double the sales it does today in 2027. Using our $100 billion earnings estimate from above and a P/E of 30, TSMC stock would therefore trade at a market cap of $3 trillion by 2027.
Of course, the company may face some margin pressure, slowing growth, or a multiple compression that will impact its ability to generate these quick returns for shareholders. Regardless, the stock looks cheap for investors who want to buy and hold for the long term.
TSMC is a great company and should remain a great company through the ups and downs of the AI infrastructure cycle.
