This company has the wind at its back and dominates a huge market.
There have officially been eight non-state-owned companies to have reached a market cap of $1 trillion. These include the “Magnificent Seven” technology companies and, most recently, Berkshire Hathaway, which just passed the threshold earlier this month. Of these companies, only Tesla and Berkshire Hathaway are below the $1 trillion threshold today.
A lot of wealth has been built betting on internet stocks, and, at least in recent years, the growing demand for artificial intelligence (AI). One company with a market cap of just under $1 trillion is a huge beneficiary of AI, Nvidia‘s key semiconductor supplier, and the dominant player in its sector. And yet, it doesn’t get nearly the same hype as other AI companies.
That company is Taiwan Semiconductor Manufacturing (TSM -4.74%). Here’s why I predict the computer chip giant will be the next company to surpass a trillion dollars in market capitalization.
Growth in AI
AI has seen an insatiable level of spending in the last few years. Collectively, companies are spending an estimated $200 billion annually, and that’s expected to rise to over $600 billion by 2028. A lot of this spending goes to semiconductor products from the likes of Nvidia and Advanced Micro Devices.
Taiwan Semiconductor (TSMC, for short) is the manufacturer that actually builds and assembles these semiconductors for third parties. It is one of the only companies in the world that can make semiconductors with ultrasmall transistor lengths, which leads to better speed when running complex AI computations. In fact, right now it is the only company with 3-nanometer semiconductors in production.
Technological superiority locks in customers such as Nvidia to the TSMC manufacturing platform. Last quarter, these advanced semiconductor types made up the majority of TSMC’s revenue, with the high-performance computing segment growing sales by 28% quarter over quarter. All this is due to the boom in AI spending. If the boom continues, it will lead to more revenue growth for TSMC.
TSMC earnings are dwarfing Tesla
The key driver of market-cap gains and stock price appreciation over the long term is earnings growth, plain and simple. TSMC has grown its earnings at a substantial rate in the last few years. Over the last 10 years, operating income has grown by 277% and currently stands at $32 billion. That is four times the trailing earnings of Tesla, one of the few stocks ever to surpass a market cap of $1 trillion.
While that may say more about Tesla’s premium valuation than anything else, TSMC is definitely not a bubble stock. It currently has a price-to-earnings ratio (P/E) of 32.6, which is reasonable for a dominant company in a growing market. These earnings come from TSMC’s leading position in advanced semiconductors. Among foundry manufacturers — those that manufacture semiconductors for third parties — it has an estimated 60% market share.
TSM Operating Income (TTM) data by YCharts
Watch earnings grow, and market cap will follow
As long as TSMC keeps its technological edge in semiconductor manufacturing, operating earnings will grow over the long term. Demand for AI is growing along with other sectors that use semiconductors and computer chips in their processes. Ever since the transistor was invented in 1947, spending on semiconductors has grown. This puts TSMC in a great position as the leading manufacturer of advanced semiconductors.
Today. TSMC has a market cap of $968 billion, meaning its stock needs to go up by around 3% in order to reach rarified air and a market cap of $1 trillion. As its earnings keep marching higher, I predict TSMC will be the next stock to hit this milestone.
Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Berkshire Hathaway, Nvidia, Taiwan Semiconductor Manufacturing, and Tesla. The Motley Fool has a disclosure policy.
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