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By Keithen Drury, The Motley Fool
Few companies are as important to today's world as Taiwan Semiconductor Manufacturing (NYSE: TSM). It produces the chips that go into devices that power artificial intelligence (AI) models, iPhones, and nearly any other application with a microchip. Taiwan Semiconductor is a leading business in this field, but it's not done growing.
Currently, Taiwan Semiconductor is valued at $845 billion, making it the ninth-largest company in the world. However, by the time 2025 comes around, it could easily cross the $1 trillion point in value.
Taiwan Semiconductor is a class-leading chip foundry
Part of Taiwan Semiconductor's success is its position in the chip market. As a foundry that sells its capabilities and manufacturing prowess to businesses that need chips, it doesn't have to worry about marketing its products; it leaves that to its customers. In many cases, Taiwan Semiconductor produces chips for companies that are competing against each other, like Nvidia and Advanced Micro Devices.
But these competitors go to the same place because of Taiwan Semiconductor's leading technology. Right now, TSMC boasts industry-leading 3 nanometer (nm) technology. This measurement describes the distance between conductive paths, and 3nm is incredibly small. For reference, a human hair is between 80,000 and 100,000 nanometers wide. The smaller the distance between these traces, the more transistors a client can pack onto the chips. This allows customers to configure their chip to be more efficient, powerful, or a combination of both.
But Taiwan Semiconductor isn't stopping there. It's already working on its 2nm node, which is expected to launch in 2025. Management stated that the demand for its 2nm chip is greater than its 3nm or 5nm at this stage in development, which is fantastic news for shareholders.
Taiwan Semiconductor is already at the top of the chip world with its innovative technology, and investors should be excited to invest in its culture of continuous improvement.
But what will it take for Taiwan Semiconductor to become a $1 trillion company?
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Taiwan Semiconductor's road to a $1 trillion valuation is clear
In Q1, TSMC's revenue increased by 13% year over year in U.S. dollars, but Q2 revenue is expected to grow by 27%. This revenue acceleration is key in Taiwan Semiconductor's growth trajectory, as 2023 wasn't its best year.
Wall Street analysts expect strong growth throughout this year and next, with revenue increasing 23% in 2024 and 22% in 2025. With the average analyst projecting $103.3 billion in revenue by the end of 2025, Taiwan Semiconductor emerged as one of the most dominant companies in the world.
While profit margins can fluctuate significantly in the chip industry (due to it being cyclical), Taiwan Semiconductor steadily produced strong profit margins.
Even if you pencil in a slight profitability decrease to a 35% profit margin by the end of 2025, Taiwan Semiconductor would be producing $36.2 billion in profits.
If you divide the target market cap of $1 trillion by the estimated 2025 profits, you get Taiwan Semiconductor's price-to-earnings (P/E) ratio. This would yield a P/E of 27.6, which isn't cheap. However, that P/E is in line with what investors have seen over the past five years and cheaper than where it is today.
As a result, if Taiwan Semiconductor hits the target that analysts think it can, it should easily be a $1 trillion company by the end of 2025. However, I think that would just be the beginning for a juggernaut like Taiwan Semiconductor, as its chips are widely used in the industry.
Because of that, I think Taiwan Semiconductor is an excellent stock to buy now, as its culture of continuous improvement will create a demand for new chips every couple of years.
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