The trillion-dollar stock club is a very exclusive list. There are only seven companies worldwide at that level, but these are some of the most recognizable brands on Earth. We're talking about names like Microsoft, Apple, and Amazon, but a few lesser-known companies are knocking at the door.
One that I think has a strong chance to gain entry by 2026 is Taiwan Semiconductor Manufacturing (TSM -0.37%). Taiwan Semiconductor is the world's leading chip manufacturer and plays a huge role in anything with a microchip. This exposes the company to hot trends like artificial intelligence and electric vehicles.
Even though it's worth less than $800 billion, I think it can easily reach the $1 trillion threshold by 2026.
Taiwan Semiconductor has industry-leading technology at its disposal
Taiwan Semiconductor is truly a market leader. It offers its clients cutting-edge technology, which allows companies like Nvidia and Advanced Micro Devices to design the most powerful products possible.
Because Taiwan Semiconductor is a contract chip manufacturer, it isn't marketing its own chips. Instead, it sells its manufacturing capabilities to companies that need it. This is a win for all involved, as its clients don't have to ramp up and maintain expensive and complicated factories, and Taiwan Semiconductor doesn't need to focus on what the consumer wants or what products will work, only on its own capabilities.
Taiwan Semiconductor offers industry-leading 3-nanometer (nm) chips. These are the most powerful varieties available and can improve processing capability, power consumption, or both, depending on how a chip is configured compared to previous-generation technology. But Taiwan Semiconductor isn't stopping there. Its 2nm chips are in development and expected to launch in 2025. Management also commented that the demand for these 2nm chips is higher than what it saw with its 3nm and 5nm launches and is centered around chip efficiency, although 2nm chips also provide a power increase.
Taiwan Semiconductor is not resting on its current technological capabilities and will continue to innovate as much as possible. But how much growth does this technology get them?
Taiwan Semiconductor may be a $1 trillion company before we know it
Taiwan Semiconductor's new technology and market expansion factor into management's growth projections, which are quite strong. In its 2022 investor conference, management laid out where it thought its business was heading, including a projection for revenue to grow between a 15% and 20% compound annual growth rate over the next few years. Management reiterated that guidance during its Q4 2023 conference call, giving us a baseline for analysis.
Over the past 12 months, Taiwan Semiconductor generated $71.5 billion in revenue. While that may seem like a lot, 2023 was actually a down year and included many quarters of shrinking revenue. However, that trend is starting to reverse, with Q1's revenue rising by 13% and April's revenue increasing by an outstanding 60% year over year.
TSM Revenue (TTM) data by YCharts
If the company can grow its revenue by 15% over the next two years (the bottom end of its long-term projections), its revenue will be $94.6 billion. Combine that figure with Taiwan Semiconductor's 38% profit margin, and you get profits of $35.9 billion. Dividing a market cap of $1 trillion by these profits yields a price-to-earnings (P/E) ratio of 27.8, nearly identical to where it trades now.
TSM PE Ratio data by YCharts
So if Taiwan Semiconductor can grow at the minimum rate management projects, the company should become a $1 trillion company over the next two years.
This is fantastic news for investors, as the stock performance would correlate to a revenue growth rate of 15% annually -- a return that will likely crush the S&P 500's long-term average return of 10%. If you want to take advantage of the massive technological shift we're experiencing, there are few better companies to invest in than Taiwan Semiconductor.
