To The Moon

$Taiwan Semiconductor Manufacturing(TSM)$ has just crossed the $1 trillion market cap mark, marking a significant milestone after reporting impressive growth in Q3. It’s now the ninth company in the world to reach this figure, excluding state-owned enterprises.

As the absolute leader in the semiconductor foundry market, TSMC is benefiting immensely from the ongoing surge in AI computing chip spending, with no signs of slowdown in sight.

Growth in HPC

TSMC stands out as the only company capable of producing ultra-fast computer chips with the smallest transistor sizes. Their 3nm and 5nm chips contributed about half of the company's Q3 revenue, indicating high demand and premium pricing. Due to this demand, TSMC anticipates a 30% revenue growth in 2024.

Looking specifically at HPC segment—which includes AI chips—Q3 revenues soared from $7.26 billion last year to $12 billion, a staggering 65% increase. This segment now accounts for 51% of total revenue, up from 42% last year. Such rapid growth is impressive for a company of this size.

Management expects this momentum to continue through 2025, supported by new factory investments. For 2024, TSMC has earmarked $30 billion for capital expenditures. Once these factories come online, they’ll significantly drive revenue growth in 2025 and 2026.

Geographic Diversification on the Horizon

A major shift for TSMC in the coming years is its expansion beyond Taiwan, aimed at mitigating potential risks.

The good news is that new factories are already under construction. In Arizona, TSMC is building three manufacturing plants, with the first expected to begin large-scale production in early 2025, utilizing advanced process nodes for key HPC clients. The second and third plants are projected to be operational by the end of the decade.

Moreover, TSMC is also establishing facilities in Japan and Europe. Management plans to invest hundreds of billions in regions outside Taiwan over the next five to ten years, potentially exceeding $100 billion.

What Comes After the Trillion-Dollar Mark?

TSMC’s financial outlook appears solid, with continued growth expected in the coming years. In the last quarter, net income rose 36% year-over-year, and operating margins expanded to 47.5%, leading to a net profit growth of 54.2%.

While a 50% profit increase isn’t sustainable forever, driven by the AI boom, TSMC is poised for double-digit annual net profit growth over the next five years. But does this mean the stock is a buy? That’s a tricky question.

Since the start of 2023, TSMC’s stock has surged 170%, and its current P/E ratio is above 30, higher than the $.SPX(.SPX)$ average. TSMC is undeniably a high-quality company, with earnings growth likely surpassing the market average, but the stock is at a historically high valuation, posing risks of valuation compression and mean reversion.