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Prediction: This will be the next semiconductor company to join Nvidia in the trillion-dollar club (hint: it’s not AMD)
As it stands today, there are only seven companies in the world with market capitalizations exceeding US$1 trillion. This exclusive club includes six of the “Magnificent Seven“– Microsoft, Litter, Nvidia, Alphabet, AmazonIt is Metaplatforms.
Nvidia is the only pure-play semiconductor and data center services company with a trillion-dollar valuation right now. But how Advanced microdevices, Information, Qualcommand more competing with it to meet the world’s demand for cutting-edge processors, I wouldn’t be surprised to see more chip stocks gaining entry into the trillion-dollar club.
But I don’t expect any of these three to become the next chip stock to reach a $1 trillion market cap. I predict, instead, that it will be Taiwan semiconductors (NYSE: TSM), currently the ninth most valuable business in the world, valued at US$806 billion.
The hidden gem of the chip industry
Nvidia and AMD develop sophisticated chips known as graphics processing units (GPUs). GPUs provide the computing power for countless generative AI applications, including machine learning, training large language models, accelerated computing, and more.
While this puts Nvidia and its rivals front and center in the artificial intelligence (AI) revolution, investors may be surprised to learn that they – and many other chip companies – rely heavily on Taiwan Semiconductor.
Although Nvidia, AMD, and many others design GPUs and other chips, they actually outsource most of their manufacturing. Taiwan Semiconductor – the world’s most productive contract chipmaker – brings its chips to life. It also has Amazon, BroadcomIntel, Qualcomm and Sony as major customers.
Image source: Getty Images
Remember to think long term
In the first quarter, the company’s revenue increased 13% year over year to $18.7 billion, a result that was at the high end of management’s guidance range.
TSM Revenue Chart (Quarterly)
One thing you might notice in the chart above is that Taiwan Semiconductor’s revenue and operating profit have fluctuated over the past few quarters. This is natural. The semiconductor industry is cyclical and Taiwan Semiconductor is not immune to business conditions that impact its customers.
During the first quarter earnings call, management pointed to seasonality in the smartphone business, in particular, as being responsible for some of the fluctuations in revenue and profit margins.
However, its long-term prospects remain strong.
TSM Revenue Estimates for Current Fiscal Year Chart
The consensus analyst estimate for Taiwan Semiconductor’s 2024 revenue is approximately $84 billion – representing 21% year-over-year growth.
The story continues
It’s clear that demand for GPUs will change in the near term. That’s because many companies that have been buying the most powerful chips are still figuring out exactly how AI will play into their long-term roadmaps. For this reason, while I expect companies to allocate more capital to these chips over time, market growth will not be linear.
While fluctuations in demand will impact Taiwan Semiconductor’s business, the long-term secular trends fueling AI should continue to benefit the company. The main theme here is that investors will need to remain patient as Taiwan Semiconductor’s newest growth story is in its early chapters.
Is now a good time to buy Taiwan Semiconductor stock?
The chart below compares Taiwan Semiconductor to a large set of players operating in various aspects of the semiconductor landscape.
TSM PS Ratio Chart
Trading at a price-to-sales (P/S) ratio of 11.3, Taiwan Semiconductor shares have a valuation right in the middle of this pack. I think Nvidia’s premium stock right now is fascinating. While the company is certainly experiencing record growth thanks to its leading GPUs and data center services, its relationship with Taiwan Semiconductor may be underrated.
In fact, considering how many chip designers trust Taiwan Semiconductor in some shape or form, it could be argued that the company’s role in the chip domain is being overlooked.
I am optimistic about AI in the long term and see Taiwan Semiconductor continuing to play a critical role in its progression. I think as companies like Nvidia and AMD continue to innovate and release new products, this will increasingly fall on the radar of more investors.
Given these dynamics, I see Taiwan Semiconductor following Nvidia to a trillion-dollar valuation sooner rather than later.
Should you invest $1,000 in Taiwanese semiconductor manufacturing right now?
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Suzanne Frey, an Alphabet executive, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions in Alphabet, Amazon, Apple, Meta Platforms, Microsoft and Nvidia. The Motley Fool holds positions and recommends ASML, Advanced Micro Devices, Alphabet, Amazon, Apple, Applied Materials, Lam Research, Meta Platforms, Microsoft, Nvidia, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and Intel and recommends the following options: long January 2025 $45 calls on Intel, long January 2026 $395 calls on Microsoft, short January 2026 $405 calls on Microsoft and May 2024 $47 short calls on Intel. The motley fool has a disclosure policy.
Prediction: This will be the next semiconductor company to join Nvidia in the trillion-dollar club (hint: it’s not AMD) was originally published by The Motley Fool