There are currently 10 public companies in the world boasting a market capitalization over $1 trillion. Among newer entrants into the trillion-dollar club is chip stock Taiwan Semiconductor Manufacturing (TSM -1.22%).
In 2024, the company, also known as TSMC, gained 90% -- essentially doubling the company's market cap from roughly $500 billion to more than $1 trillion today. Indeed, this is a steep increase in valuation in just 12 months, but what if I told you the stock is still a bargain?
Below, I'll make the case for why TSMC is attractively priced right now and should be on growth investors' radar.
Examining TSMC's current financial profile
In the table below, you can see TSMC's annual growth figures for both revenue and profit across the last several quarters:
| Metric | Q1 2024 | Q2 2024 | Q3 2024 | Q4 2024 |
|---|---|---|---|---|
| Revenue growth (YOY) | 16.5% | 40.1% | 39.0% | 38.8% |
| Earnings per share growth (YOY) | 8.9% | 36.3% | 54.2% | 57.0% |
Data source: Taiwan Semiconductor. YOY = year over year.
Over the last 12 months, TSMC has rapidly accelerated its top-line growth. But more importantly, the company's gross margin is widening, leading to strong earnings growth as well. With a financial profile like this, it makes sense that shares of TSMC have been soaring to new heights.
Moreover, industry trends suggest the company's long-term growth potential looks equally robust. Hyperscalers such as Microsoft, Alphabet, Amazon, and Oracle all plan on spending billions on AI infrastructure over the next several years, which will require TSMC's leading foundry operations.
Data by YCharts.
To my eyes, the revenue and earnings projections illustrated above suggest TSMC is well positioned to continue capturing a significant portion of AI spending as new data centers and chipware emerge onto the scene.
And yet, even with impressive revenue and earnings-per-share projections, TSMC stock looks dirt cheap.
Image source: Getty Images.
Investors could be significantly underpricing this AI gem
It's understandable to believe you already missed the boat with TSMC. Stocks do not rise at a 90% pace forever, and a trillion-dollar valuation could give the illusion that shares of TSMC don't have much higher to go.
The stock trades for $223 as of this writing -- nearly an all-time high. Looking at the momentum fueling TSMC could further suggest the stock is overvalued.
However, even with its soaring share price, TSMC's forward price-to-earnings (P/E) ratio is only 25. I say "only" because the average forward P/E of the S&P 500 is 24.
As I outlined in the table and chart in the prior section, TSMC is a rare example of a business this size that's accelerating it top- and-bottom-line growth. More importantly, the company's EPS growth is climbing at a faster rate than sales. This is an important to understand because when you analyze TSMC using earnings-based methodologies, the company's valuation begins to appear much more reasonable.
To me, the current valuation expansion occurring for TSMC is completely appropriate. This is a period of normalization after it traded at a discount to other chip companies for a prolonged period.
I'm bullish that secular tailwinds fueling AI will remain strong, thereby supporting TSMC's leading position in the chip industry. For this reason, Taiwan Semi could witness many more years of compounding revenue and earnings growth. At its current levels, investors should be pouncing on this growth stock.
