Since early last year, it's become crystal clear that advancements in artificial intelligence (AI) are causing a paradigm shift in technology. Nowhere is that more evident than in the list of companies that are among the world's most valuable, measured in terms of market cap.
Microsoft made headlines over the past year or so with its definitive moves in generative AI and is currently the only company with a market cap above $3 trillion. Apple has been toying with AI for years, and while it ceded its market cap crown to Microsoft, it continues to cling stubbornly to second place, worth $2.9 trillion. Nvidia has moved up the ranks quickly thanks to its industry-leading AI-centric computer chips, currently worth $2.3 trillion. Alphabet, Amazon, and Meta Platforms round out the other top 10 AI players, with market caps of between $2.1 trillion and $1.2 trillion.
With a market cap of roughly $789 billion (as of this writing), it seems clear that Taiwan Semiconductor Manufacturing (TSM -1.25%), often referred to as TSMC, is bucking for membership in this elite fraternity. Given the accelerating demand for the semiconductors needed for AI, TSMC's admittance might come sooner than later.
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You want chips with that?
As the world's largest contract chipmaker, TSMC is in an enviable position in the industry. The company doesn't make semiconductors for its own use, but rather is contracted to make them for big tech companies, including Nvidia, Arm Holdings, Advanced Micro Devices, and Apple, among others.
Once upon a time, the bulk of TSMC's revenue came from processors used in smartphones, but high-performance computing (HPC), which includes chips used for AI, has taken the top spot, recently accounting for 46% of revenue.
Business is picking up. In the first quarter, revenue climbed 16.5% to $18.9 billion, while its earnings per share (EPS) of $1.38 edged 5% higher. Management is expecting its accelerating growth to continue, forecasting second-quarter revenue of $20 billion at the midpoint of its guidance, which would represent growth of 28%.
The path to $1 trillion
TSMC is in an enviable position in the AI revolution. It's a foundry partner to the AI stars, and since it makes chips for all comers, it's not a part of the fierce competition for AI chip supremacy. Given its position in the space and its current size, I don't think it will take very long to join the society of trillionaires.
According to Wall Street, TSMC is poised to generate revenue of $84.8 billion in 2024, giving it a forward price-to-sales (P/S) ratio of roughly 9.3. Assuming its P/S remains constant, TSM would have to grow its revenue to roughly $107 billion annually to support a $1 trillion market cap.
Interestingly, Wall Street is forecasting revenue growth of 22% in both 2024 and 2025. If the company achieves those fairly reasonable benchmarks, it could easily achieve a $1 trillion market cap by 2026.
There could be much more to come. TSM's management expects the company's AI-related revenue to grow at a compound annual growth rate of 50% over the coming five years and account for 20% of TSM's total revenue by 2028.
That's not surprising, considering the magnitude of the opportunity. Generative AI is expected to generate economic value of between $2.6 trillion and $4.4 trillion annually over the coming decade, according to global management consulting firm McKinsey & Company. However, estimates continue to ratchet higher as more applications for AI join the mix.
Finally, at just 24 times forward earnings, TSMC is attractively priced, giving investors an inexpensive way to profit from the AI revolution.
