The paradigm shift brought about by artificial intelligence (AI) is changing the face of the technology landscape. If you're looking for evidence of this trend, nowhere is it more apparent than the list of the world's largest companies when measured by market cap.
Microsoft, at the forefront of AI-powered assistants, boasts a market cap of $3.37 trillion, ahead of the previous champ. Apple, at $3.27 trillion, has dabbled in AI for more than a decade and recently announced sweeping AI updates for many of its devices. Nvidia has been the poster child of AI chipmakers and the third company to sport a market cap of more than $3 trillion. The leaders are followed closely by Alphabet, Amazon, and Meta Platforms -- all leaders in generative AI -- with market caps of between $1.31 trillion and $2.29 trillion.
With a market cap of roughly $891 billion (as of this writing), Taiwan Semiconductor Manufacturing (TSM 1.27%), often referred to as TSMC, is on track to join this elite group of businesses, probably sooner than later. The adoption of AI continues to gain ground, buoying demand for chips used in the process. As the world's largest semiconductor foundry, TSMC seems destined to join this exclusive fraternity.
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A chip off the old block
After years of operating in relative obscurity, it appears TSMC's time in the limelight has come. The company describes itself as the "world's largest and best semiconductor foundry," occupying an enviable position in the AI revolution. More specifically, AI processing requires state-of-the-art semiconductors, and TSMC is the chipmaker to the stars. Its biggest customers include Nvidia, Arm Holdings, Advanced Micro Devices, and Apple, among many others.
However, the trajectory of the business has shifted in recent years. TSMC once relied on smartphone chips for the bulk of its revenue, but high-performance computing (HPC), which includes specialized chips used for processing AI, has become the company's biggest moneymaker, recently representing 46% of sales.
TSMC's growth is accelerating. Revenue grew 16.5% year over year to $18.9 billion in the first quarter, while earnings per share (EPS) of $1.38 crept 5% higher, as the company boosted research and development (R&D) spending to keep up with evolving technology.
The company is expecting this growth spurt to continue. Management's outlook is calling for second-quarter revenue of $20 billion at the midpoint of its guidance, or growth of about 28%. That forecast could end up being conservative. In April and May, the company reported revenue growth of 60% and 30% year over year, respectively, far outpacing management's projections.
The path to $1 trillion
TSMC occupies a noteworthy space in the AI ecosystem. Since its processors are used by many of the biggest names in the space, TSMC stands to benefit from the accelerating adoption of generative AI -- which has created much of the buzz over the past year or so. Furthermore, its accelerating revenue provides evidence that management is leaning into this opportunity. As such, it should soon vault TSMC into the company of trillionaires.
According to Wall Street, TSMC is poised to generate revenue of $85.17 billion in 2024, giving it a forward price-to-sales (P/S) ratio of roughly 10.5. Assuming its P/S remains constant, TSM would have to grow its revenue to roughly $95 billion annually to support a $1 trillion market cap.
What's even more intriguing is that Wall Street is already forecasting revenue growth of 32% and 22% in 2024 and 2025, respectively. If the company clears those relatively low hurdles, it will likely achieve a $1 trillion market cap sometime in 2025. However, given the excitement surrounding AI, it could happen even sooner.
The runway for growth ahead is compelling. During the first-quarter earnings call, CEO C.C. Wei said, "For the next five years, we forecast [AI-related revenue] to grow at 50% CAGR [compound annual growth rate] and to increase to higher than 20% of our revenue by 2028."
Estimates regarding the continued proliferation of AI support his conclusions. Generative AI is expected to add between $2.6 trillion and $4.4 trillion to the global economy annually over the next 10 years, according to global management consulting firm McKinsey & Company. It's worth noting that even the most conservative estimates have been trending higher as new use cases for AI are discovered.
Finally, at 27 times forward earnings, TSMC's valuation is compelling, offering a less-pricey way to invest in the massive opportunity represented by AI.
