Artificial intelligence (AI) has been all the rage over the past couple of years and has seen its adoption growing at a dramatic pace. This, in turn, has accelerated the sales, profits, and resulting market caps of some of the world's most well-known companies. Indeed, six of the top seven most-valuable companies in the world hail from the "Magnificent Seven," a group of companies with inexorable ties to AI.
Leading the list are four of the world's leading developers of AI-centric technology. Apple tops the chart at $3.4 trillion. Nvidia, Microsoft, and Alphabet round out the quartet, with market values of $3.2 trillion, $3 trillion, and $2.16 trillion, respectively.
With a market cap of roughly $977 billion (as of this writing), it might seem a bit premature to predict that Taiwan Semiconductor Manufacturing (TSM -1.45%), often referred to as TSMC, will soon be eligible for membership in this exclusive fraternity, but the company has all the trappings of success. The adoption of AI continues to grow, and the advanced semiconductors that underpin these sophisticated algorithms have seen demand explode. As the largest foundry in the world, TSMC is the world's largest provider of these next-generation processors, so its ascent into this prestigious club seems inevitable.
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A side of chips
TSMC has been a leading provider of semiconductors for more than three decades, but the advent of AI has brought the company out of the shadows.
Management describes TSMC as the "world's largest and best semiconductor foundry," which explains why it's a key player in the accelerating adoption of AI. These systems require state-of-the-art semiconductors, putting TSMC in the pole position. Its customer list helps illustrate its advantage, as it includes industry leaders such as Nvidia, Arm Holdings, Advanced Micro Devices, Broadcom, Apple, and others.
Furthermore, while processors used in smartphones once accounted for the bulk of its fortunes, high-performance computing (HPC) and AI now represent 51% of TSMC's revenue.
Its results are enlightening. Revenue grew 36% year over year to $23.5 billion in the third quarter, while earnings per share (EPS) of $1.94 jumped 54%. Management expects the company's stellar growth to continue, guiding for Q4 revenue of $26.5 billion at the midpoint of its guidance, or growth of about 35%. That forecast may well be conservative. In September, the company reported revenue that grew 40% year over year, which was well ahead of management's guidance.
Finally, TSMC manufactures an estimated 90% of the world's most-advanced semiconductors, which will likely continue to fuel its AI-centric growth.
The path to $1 trillion
As the world's largest semiconductor foundry, TSMC has a critical role in the advancement of AI. None of its rivals can even come close to matching the technological advantages it holds in producing the world's most in-demand AI processors. Furthermore, the company's accelerating revenue growth helps illustrate the opportunity ahead. It also suggests TSMC will ascend into the ranks of the multitrillionaires.
According to Wall Street, TSMC is poised to generate revenue of $89.41 billion in 2024, giving it a forward price-to-sales (P/S) ratio of roughly 10.9. Assuming its P/S remains constant, TSMC would have to increase its revenue to roughly $183 billion annually to support a $2 trillion market cap.
The company's outlook is implying full-year growth of roughly 29% in 2024, and Wall Street concurs, with analysts expecting revenue growth of 29% and 26% in 2024 and 2025, respectively. If the company can clear those hurdles, it will likely achieve a $2 trillion market cap by early 2028. However, the soaring adoption of AI suggests it could come even sooner. Furthermore, the ongoing rebound in the smartphone industry will also benefit TSMC.
Generative AI is expected to add between $2.6 trillion and $4.4 trillion to the global economy annually over the coming decade, according to global management consulting firm McKinsey & Company. However, estimates regarding the impact of AI continue to ratchet higher as new-use cases are revealed.
Finally, at 30 times earnings, TSMC is attractively priced, particularly when viewed in the light of its ongoing opportunity.
