Semiconductors are the foundation upon which technology is built, and this company is ringing the cash register.
There are currently 12 companies that are worth $1 trillion or more, but only three are members of the prestigious $3 trillion club (as of this writing): Nvidia at $4.4 trillion, Apple at $3.7 trillion, and Alphabet at $3.7 trillion.
I am convinced that Taiwan Semiconductor Manufacturing (TSM 0.47%), commonly called TSMC, is on the fast track to join this elite fraternity. As the world’s largest and most renowned semiconductor foundry, TSMC is a crucial player in the artificial intelligence (AI) and data center buildout, which is driving strong financial and operating results.
The company has a market capitalization of $1.9 trillion as I write this, so investors who buy TSMC right now could generate returns of 58% if it secures its membership in the $3 trillion club.
Image source: Getty Images.
Chips ahoy!
TSMC is billed as the world’s most advanced chip foundry and the world’s largest contract chipmaker. It has a 71% share of the global chip market and produces more than 90% of the most advanced semiconductors, so it’s well positioned to capitalize on the current boom.
Furthermore, no foundry is as technologically advanced as TSMC. That’s why its customers are among the most well-known companies in the world, including Nvidia, Advanced Micro Devices, Arm Holdings, and Apple, among others.
Smartphone chips once generated the lion’s share of TSMC’s revenue. Now, however, advanced chips used for AI, data centers, and high-performance computing top of the list, representing 55% of sales.
Enviable financial results
TSMC’s results illustrate its accelerating growth. In the fourth quarter, revenue of $33.7 billion grew 26% year over year and 2% sequentially, while earnings per American Depository share jumped 35% to $3.14.
It wasn’t just the top and bottom-line numbers that were impressive. TSMC’s gross margin of 59.9% improved 380 basis points, while its operating margin of 50.8% increased 510 basis points. These expanding margins indicate that the company’s leverage increases as it scales its foundry operations.
Management expects its growth streak to continue. The company is forecasting first-quarter revenue of $35.2 billion at the midpoint of its guidance, representing 38% year-over-year growth.
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The path to $3 trillion
TSMC is in an enviable position as the leading provider of advanced semiconductors and is well-positioned to benefit from the shifting landscape, as many of the biggest names in tech are its customers. Furthermore, TSMC’s accelerating revenue growth is a clear indication that the company is poised to profit from this opportunity. This will drive TSMC into the company of multi-trillionaires.
Wall Street expects TSMC to generate revenue of $157.8 billion in 2026, giving it a forward price-to-sales (P/S) ratio of roughly 12. Assuming its P/S ratio remains constant, TSMC will need to generate revenue of roughly $250 billion annually to justify a $3 trillion market cap.
It’s suggestive that analysts are forecasting revenue for TSMC of $193.9 billion and $232.8 billion in 2027 and 2028, respectively. If the company achieves those relatively low hurdles, it will be within striking distance of a $3 trillion market cap sometime in 2029. That said, the company’s accelerating growth over the past few years suggests it could get there even sooner.
Demand for high-end semiconductors continues to ratchet higher, with annual sales projected to reach nearly $1 trillion in 2026, according to McKinsey & Company. TSMC is seeing strong demand for its leading-edge process technology and expects that paradigm to continue. As a leading provider of advanced semiconductors, TSMC is riding the wave of these secular tailwinds.
Despite its recent rise, TSMC stock trades for just 24 times forward earnings. That’s why Taiwan Semiconductor Manufacturing is a buy.
Danny Vena, CPA has positions in Alphabet, Apple, and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Apple, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
