Nvidia (NASDAQ: NVDA) has seen its share price soar on the back of huge artificial intelligence (AI)-related spending from big tech companies. The company's graphics processing units (GPUs) are essential infrastructure for training large language models, the backbone of generative AI. As more and more companies invest in the frontier of AI development, Nvidia has been a big beneficiary.
The chipmaker joined the $1 trillion club last summer and passed a $2 trillion valuation in February. After a brief foray into the $3 trillion territory, the stock sits just below that threshold as of this writing.
But Nvidia isn't the only chipmaker riding the tidal wave of AI spending. Several others have seen big boosts to their business as a result of the requisite data center build-outs, including Broadcom (NASDAQ: AVGO). Broadcom's networking and AI accelerator chips have proven increasingly valuable as data centers rapidly expand. Both help big tech companies get the most from their investments and have propelled the chipmaker to a $750 billion valuation.
The next semiconductor stock to join Nvidia in the trillion-dollar club won't be Broadcom, though. Investors should look up the supply chain to find the next chipmaker to exceed a $1 trillion valuation: Taiwan Semiconductor Manufacturing Company (NYSE: TSM).
This company wins when chipmakers compete
Taiwan Semiconductor Manufacturing Company (TSMC) is the largest chip fabricator in the world. It accounts for roughly 60% of all foundry spending, and there's a good reason: It has the most advanced chip manufacturing processes in the world. That allows it to make more powerful and power-efficient chips for its customers. Both areas are extremely important for AI and other areas, such as smartphones.
Importantly, it's unlikely TSMC's next-closest competitor will be able to unseat the company from its position. TSMC's scale is a massive advantage. With so much revenue coming in, it's able to invest more in research and development. That ensures it remains at the leading edge of manufacturing processes.
Big customers, including Nvidia, Broadcom, Apple (NASDAQ: AAPL), and others contract with TSMC to produce the chips they design for sale and for use in their products. Almost anyone who wants to compete with those companies likely contracts with TSMC as well. So, even if Nvidia or Broadcom start losing market share to a competitor, TSMC is unlikely to lose business overall. In fact, competition for TSMC's limited resources is great for its business.
That's seen in its most recent financial reporting. TSMC set a new monthly revenue record in July when it brought in 257 billion New Taiwan dollars (US$8 billion). That's a 45% year-over-year increase for the month. Last quarter, the company saw revenue grow 40% (33% in USD) and net income grow 36%. Two-thirds of its revenue came from its most advanced chip processes.
There's a lot more growth in the pipeline
TSMC should continue to benefit from several catalysts over the next few years. That starts with management's outlook for the third quarter.
It expects $22.4 billion to $23.2 billion in revenue for the quarter, and it's already ahead of pace with its July sales. At its midpoint, the outlook represents 32% year-over-year growth. Moreover, it expects gross margin to expand to between 53.5% and 55.5%. That suggests the company is exhibiting pricing power amid growing customer demand.
That demand should keep growing as big tech companies share plans to spend heavily on AI server capacity. Meta Platforms said it expects significant capital expenditures (capex) growth in 2025, even as it sets new records for capex this year. Likewise, Alphabet's management said the cost of overspending is far less than the cost of under-investing in AI, so investors should expect considerable capital investments there as well. Similar sentiments are echoed throughout the tech space.
Many investors are expecting strong results from the next Apple iPhone release, which will include support for new Apple AI features. Many existing iPhone users will be unable to use the latest AI capabilities offered by Apple due to hardware restrictions, which could spur a significant round of upgrades over the next year. Strong iPhone demand will mean strong demand for TSMC's chips.
TSMC is preparing for the increased demand. It narrowed its capex forecast for the year to between $30 billion and $32 billion, increasing the low end from $28 billion. The increased spending outlook came with this comment from management: "At TSMC, a higher level of capital expenditures is always correlated with the higher growth opportunities in the following years."
The stock has room to rise
Despite TSMC's $875 billion market cap, the stock looks undervalued at today's price. Shares currently trade for a forward price-to-earnings ratio (P/E) of just 26.5. Meanwhile, strong revenue growth and margin expansion can support earnings growth above 20% per year for the foreseeable future. Analysts currently expect 21.5% earnings growth per year over the next five years.
That makes TSMC one of the most attractive AI chipmaker stocks on the market. It currently sits about 14% away from the trillion-dollar club, so it shouldn't be long before it reaches the milestone.
Should you invest $1,000 in Taiwan Semiconductor Manufacturing right now?
Before you buy stock in Taiwan Semiconductor Manufacturing, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Taiwan Semiconductor Manufacturing wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $763,374!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of August 12, 2024
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Adam Levy has positions in Alphabet, Apple, Meta Platforms, and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Alphabet, Apple, Meta Platforms, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
Prediction: This Will Be the Next Artificial Intelligence (AI) Chipmaker Stock to Join Nvidia in the Trillion-Dollar Club (Hint: It's Not Broadcom) was originally published by The Motley Fool