This leading manufacturer is widening the gap with its rivals.
Taiwan Semiconductor Manufacturing (TSM 1.20%) has just reached rarefied air. The semiconductor giant, known as TSMC, just reported incredible growth in the third quarter and surpassed the $1 trillion market cap. Excluding state-owned enterprises, it is the ninth company in the world with a market capitalization of over $1 trillion.
TSMC has directly benefited from increased spending on artificial intelligence (AI) computer chips, dominating the semiconductor foundry market, and showing no signs of slowing down. Here’s what happens to stocks next.
Growth of high-performance computing
TSMC is the only company in the world that can manufacture ultra-high-speed computer chips with minimal transistor lengths. These 3-nanometer and 5-nanometer “nodes” accounted for about half of the company’s revenue in the third quarter, as computer chip companies point to high prices and surging demand for these products. There is. Due to this demand, TSMC now expects its 2024 revenue to increase by 30% in USD terms.
Let’s break down this growth from the high-performance computing (HPC) segment in which TSMC categorizes its spending on AI computer chips. In the third quarter of 2024, HPC chip revenue accounted for 51% of overall revenue. In the same period last year, it accounted for 42% of sales. This means HPC revenue in 2023 will be $7.26 billion (in USD), compared to $12 billion in HPC revenue last quarter, an approximately 65% year-over-year revenue increase. Masu. This is incredible growth for such a large company.
Management expects growth to continue through 2025. The company plans to invest in new factories in anticipation of future demand. As of the latest update, it plans to spend $30 billion in capital spending in 2024. As long as these new factories are utilized, this should lead to increased revenue in 2025 and 2026.
Geographical diversification finally comes true
The big change for TSMC over the next few years will be diversification outside of its home market of Taiwan. The company and its customers want to prevent Beijing’s military rhetoric around Taiwan from turning the island into a choke point for semiconductor supplies.
The good news is that these new factories are being built. Three manufacturing facilities are under construction in Arizona, with the first scheduled to begin high-volume production in early 2025. Equipped with advanced process nodes, it can serve customers in the most important HPC segments. The second and third facilities are expected to be completed by the end of this decade, hopefully.
TSMC is also building facilities in Japan and Europe to further its geographic diversification. Management plans to spend tens of billions of dollars, possibly more than $100 billion, on new factories outside of Taiwan over the next five to 10 years. Investors need to track these developments. These are important in helping to mitigate geopolitical risks and testing whether the same profit margins can be replicated outside of Taiwan.
TSM data by YCharts
What’s next after $1 trillion?
TSMC’s financial statements look strong, and the company appears poised for growth in the coming years. Net revenue increased 36% sequentially in US dollar terms, and operating margin expanded to 47.5%. This resulted in an impressive 54.2% increase in net income for the quarter. 50% profit growth won’t last forever, but thanks to the AI boom, I think there’s a good chance TSMC will grow its net profit at a double-digit percentage each year on average for the next five years.
But does that make the stock a buy? I’m not sure. Since the start of 2023, TSMC stock is up 170%. Its current price-to-earnings ratio (P/E) is well over 30 times, which is higher than the average for the S&P 500 index. Yes, TSMC is a better company than the average company in the index and should grow earnings faster than the average publicly traded stock. However, the stock is trading at an all-time high P/E. Therefore, you can be prepared for multiple compression risks and regression to the mean.
I don’t blame the investors who bought TSMC, which had a market capitalization of over $1 trillion. I think it’s highly likely that its market capitalization will be larger in five years than it is now. However, with the stock up 170% in less than two years, I don’t think it’s an opportunity to pass up.
Brett Schaefer has no position in any stocks mentioned. The Motley Fool owns a position in and recommends Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
