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 evident than the list of the world’s largest companies measured by market capitalization.
Microsoftat the forefront of AI-powered assistantshas a market capitalization of $3.37 trillion, ahead of the previous champion. Applewith a value of $3.27 trillion, has been interested in AI for over a decade and recently announced sweeping AI updates for many of its devices. Nvidia was the poster child for AI chipmakers and the third company to boast a market capitalization of over $3 trillion. The leaders are closely followed by Alphabet, AmazonAnd Meta-platforms — all leaders of Generative AI — with market capitalizations between $1.31 and $2.29 trillion.
With a market capitalization of approximately $891 billion (at the time of writing), Semiconductor Manufacturing in Taiwan (NYSE: TSM), often called TSMC, is poised to join this elite group of companies, probably sooner rather than later. AI adoption continues to gain momentum, driving demand for chips used in the process. As the world’s largest semiconductor foundry, TSMC seems destined to join this exclusive fraternity.
A chip off the old block
After years of operating in relative obscurity, it seems TSMC’s time in the spotlight has come. The company describes itself as “the world’s biggest and best semiconductor foundry,” occupying an enviable position in the AI revolution. Specifically, AI processing requires cutting-edge semiconductors, and TSMC is the chipmaker to the stars. Its biggest customers include Nvidia, Arm holds, Advanced microsystemsand Apple, among others.
However, the company’s trajectory has changed 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 AI processing, has become the company’s largest source of revenue , recently representing 46% of sales.
TSMC’s growth is accelerating. Revenue rose 16.5% year over year to $18.9 billion in the first quarter, while earnings per share (EPS) of $1.38 increased 5 %, as the company has increased its spending on research and development (R&D) to keep up with technological developments.
The company expects this growth spurt to continue. Management’s outlook calls for second-quarter revenue of $20 billion, the midpoint of its guidance, or growth of about 28%. That forecast may prove conservative. In April and May, the company posted year-over-year revenue growth of 60% and 30%, respectively, far exceeding management’s expectations.
The path to $1 trillion
TSMC occupies a remarkable place in the AI ecosystem. Given that its processors are used by many of the biggest names in the industry, TSMC stands to benefit from the accelerated adoption of generative AI – which has created much of the buzz over the past year. Moreover, its accelerating revenues prove that management is leaning into this opportunity. As such, it should soon put TSMC in the company of billionaires.
According to Wall Street, TSMC is expected to generate revenue of $85.17 billion in 2024, giving it a forward price-to-sales (P/S) ratio of around 10.5. Assuming its P/S remains constant, TSM would need to grow its revenue to around $95 billion per year to support a market cap of $1 trillion.
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 these relatively low hurdles, it will likely reach a market cap of $1 trillion in 2025. However, given the excitement surrounding AI, this could happen even sooner.
Growth prospects are promising. During the first quarter earnings conference call, CEO CC Wei said: “For the next five years, we expect AI revenue to grow at 50% CAGR (compound annual growth rate) and that they will exceed 20% of our revenues by 2028.”
Estimates of AI’s continued proliferation support his findings. 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 tend to increase as new AI use cases are discovered.
Finally, at 27 times forward earnings, TSMC’s valuation is compelling, offering a less expensive way to invest in the massive opportunity presented by AI.
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