Few companies have managed to exceed a trillion dollars in market capitalization, and even fewer have managed to stay above that threshold. Currently, only four U.S. companies maintain this designation: Apple, Microsoft, Alphabet, and Amazon (Amazon is just barely above a $1 trillion market cap). After that, there’s quite the gap between Amazon and fifth-place Nvidia, at about $663 billion.
By 2030, it’s quite likely there will be multiple new entrants into this club, and one that I think could reach this threshold is Taiwan Semiconductor Manufacturing (NYSE: TSM), better known as TSMC. With TSMC sitting at a $480 billion market cap right now, the company would need to maintain an 11% compounded annual growth rate through 2030 to hit that next-level valuation. That means it would need to exceed the broader market’s long-term 10% average growth rate.
Does TSMC have what it takes to join the trillion-dollar market cap club? Let’s explore.
Image source: TSMC.
TSMC is a technological leader
TSMC is a leading semiconductor foundry that doesn’t produce its own chips to market under its name. Instead, it offers its services to chip designers like Apple, Nvidia, and Advanced Micro Devices to make the chips they use in their products. TSMC doesn’t compete directly with any of these companies, which allows it to have a strong relationship with them as a simple component supplier. TSMC’s expertise in this industry means the company is popular and it has nurtured a diversified group of customers.
TSMC produces some of the most powerful chips in the world at large scales, which helps it generate plenty of revenue. Its 5 nanometer (nm) and 7nm chips, which many of its competitors cannot yet produce, accounted for 32% and 22%, respectively, of TSMC’s revenue in Q4. These cutting-edge chips are vital to TSMC’s business model. And always going for that next level of production, TSMC is already getting its production lines ready to produce the next iteration of more powerful semiconductors: 3nm chips. This new iteration offers a 15% speed improvement over the 5nm variety while using 30% less power.
If TSMC hopes to be a $1 trillion company by 2030, it must continue developing ways to produce these cutting-edge chips at scale for its clients. So far, TSMC has proven to be up to the task. However, there is one risk to consider as well.
Designed in America, made in Taiwan
As implied by the country being in its name, TSMC produces most of its chips in Taiwan. That production concentration in a country that is potentially vulnerable to Chinese aggression does not sit well with many of the companies it produces chips for, nor does the U.S. government approve of the situation as it can be interpreted as a national security risk. This concentration is a notable concern for investors as well.
The recently passed CHIPS Act in the U.S. was designed specifically to correct this situation. TSMC is aware of its vulnerability and began to expand outside of Taiwan to ease these worries. Just in December 2022, It announced plans to invest $40 billion to build a second U.S. semiconductor plant in Arizona. It’s also hiring at its current Arizona plant, potentially luring Intel‘s employees, who recently received a pay cut and reduced benefits.
This geographic diversification should boost TSMC’s sales, as many U.S. companies will get to say they use domestically produced chips (even if a foreign entity owns the manufacturing facility).
A slowdown is coming, but the long-term tailwinds still prevail
The storyline of how TSMC can continue to succeed is clear, but will that success be enough to push the market cap above $1 trillion?
One headwind at the moment is that the global chips industry is in a cyclical downturn right now related to lower PC sales. This cycle was reflected in TSMC’s Q4 earnings, as it showed revenue down 1.5% sequentially from Q3 (but still up 26.7% year over year). Some of that drop could be related to currency conversion headwinds related to the strong dollar. Despite the potential lower revenue growth, earnings per share (EPS) in Q4 exploded higher, rising 78% year over year and 5.4% when compared to Q3.
The drop in PC-related sales is something to monitor, but the potential for 3nm chips this year still points to plenty of future upsides for TSMC. But you wouldn’t think that by looking at Wall Street analysts forecasts for TSMC. They think the drop in PC sales will result in TSMC revenue dropping 1.1% this year (in U.S. dollars). Still, They also forecast TSMC will return to growth mode in 2024 and will grow revenue by 21.2%.
That grim 2023 forecast means TSMC’s stock is trading at a low valuation.
TSM PE Ratio data by YCharts
Even when the forward price-to-earnings (P/E) ratio is used (which factors in the earnings drop for 2023), the stock is well below its decade-long average valuation. This tells me the stock isn’t overvalued, and business performance will likely drive any stock appreciation.
Can TSMC cross the $1 trillion threshold by 2030?
I’d say TSMC has a fair chance of hitting the $1 trillion goal by 2030. It only needs to grow at an 11% compounded rate, and TSMC’s new technology and current market dominance will likely deliver that level of sustained growth. Plus, TSMC’s stock is reasonably valued, so growth should find its way to the share price.
Unless something big goes wrong with China/Taiwan or China/U.S. relations, TSMC is a strong candidate to become a $1 trillion company. Investors who are comfortable with some volatility associated with chip manufacturers and semiconductor cycles should consider establishing a position in this winning stock.
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Suzanne Frey, an executive at Alphabet, 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. Keithen Drury has positions in Alphabet, Amazon.com, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon.com, Apple, Intel, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, long March 2023 $120 calls on Apple, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
