As of Jan. 17, there are 10 public companies in the world with valuations of at least $1 trillion. With the exception of Warren Buffett's investment powerhouse, Berkshire Hathaway, each trillion-dollar stock is playing a leading role in the ongoing artificial intelligence (AI) revolution.
After gaining 110% over the last year, chip stock Taiwan Semiconductor Manufacturing (TSM +3.19%) joined a major client, Nvidia, in the trillion-dollar club. With a current share price of $213, TSMC is trading near a 52-week high.
Below, I'm going to explore why TSMC could initiate a stock split sooner rather than later and how such a move could impact investors.
NYSE: TSM
Key Data Points
Why might TSMC explore a stock split?
The chart below illustrates TSMC's market cap gains over the last year. In just 12 months, the company has seen its valuation essentially double from roughly $500 billion to more than $1 trillion today. Given this degree of valuation expansion in such a short time frame, a stock split could be a reasonable move to make right now.
TSM Market Cap data by YCharts
When a company splits its stock, the number of outstanding shares rises. For example, when Nvidia completed a 10-for-1 stock split several months ago, the number of outstanding shares increased by tenfold while the company's share price dropped by a factor of 10. All told, stock splits do not change a company's valuation.
Since splits result in an increased number of outstanding shares, it takes significantly more buying activity to push a stock price higher. This makes stock splits a potential signal of a bullish management team and its confidence in the company's long-term prospects. Pursuing a stock split could indicate that management believes the stock will continue to rise, even though unlocking these gains can become tougher to achieve due to a higher outstanding share count.
Why TSMC may choose to keep things status quo
TSMC sits in a unique position in the chip realm. The company specializes in sophisticated fabrication processes that bring chips from Nvidia, Advanced Micro Devices, and many others to life.
Industry research suggests that investment in AI infrastructure will be in the trillions for years to come. And when it comes to GPUs in particular, the total addressable market is expected to be worth nearly $300 billion by the end of the decade. Considering Nvidia, AMD, and many of the hyperscalers including Microsoft, Amazon, Alphabet, and Meta Platforms are all bringing more chipware to the market, I see TSMC experiencing AI tailwinds for several years to come.
But at more than $200 per share, isn't TSMC's stock beginning to look expensive? Well, not so fast.
When it comes to valuation, looking at the share price alone won't tell you much. If you see that TSMC's stock price is $200 and Nvidia's is $140, that doesn't necessarily mean that TSMC is the more valuable company. In this example, Nvidia's market cap is $3.4 trillion -- nearly triple that of TSMC.
Image source: Getty Images.
Is Taiwan Semiconductor stock a buy right now?
To determine if TSMC stock is expensive, you'll need to look at valuation multiples. In the chart below, you can see that the stock's forward price-to-earnings (P/E) ratio of 23.4 is nearly identical to that of the average forward P/E for the S&P 500 (^GSPC +1.75%).
TSM PE Ratio (Forward) data by YCharts
These dynamics suggest that investors view a position in TSMC as having the same upside as the broader market. When you look at TSMC in this way, the company's soaring valuation and high share price don't actually seem so pricey. Furthermore, given the upside from rising investment in AI capital expenditure (capex) over the next several years, I think it's highly likely that shares of TSMC will eventually receive a notable premium compared to the S&P 500.
For all of these reasons, I see TSMC as a compelling opportunity to buy and hold for the long run -- regardless of a potential split.
