Taiwan Semiconductor Manufacturing (NYSE: TSM) has reached a significant milestone. The semiconductor leader, known as TSMC, recently surpassed a market cap of $1 trillion after reporting impressive growth for the third quarter. Excluding state-owned enterprises, TSMC is now the ninth company globally to achieve this valuation.

TSMC has benefited directly from increasing spending on artificial intelligence (AI) chips, allowing it to dominate the semiconductor foundry market with no signs of a slowdown. Here’s a closer look at what might lie ahead for the stock.

Surge in High-Performance Computing

As the only company capable of producing ultrafast computer chips with the smallest transistor sizes, TSMC’s 3- and 5-nanometer technology constituted around half of its revenue in the third quarter. This reflects the high demand and prices that chip manufacturers are willing to pay. TSMC projects a 30% revenue increase in U.S. dollars for 2024.

The high-performance computing (HPC) sector, relevant to AI chip spending, played a major role in this growth. In Q3 of 2024, HPC chips accounted for 51% of TSMC’s total revenue, up from 42% in the same quarter last year. This translates to $12 billion in HPC revenue last quarter compared to $7.26 billion in 2023, marking a remarkable 65% year-over-year increase. Such growth is impressive for a company of TSMC’s size.

Looking ahead, management anticipates further growth through 2025. The company plans to invest significantly in new factories to meet future demand, with a reported $30 billion allocated for capital expenditures in 2024. This investment is likely to drive additional revenue in the years to come, assuming the factories are fully operational.

Expanding Geographic Reach

A significant shift for TSMC will occur as it aims to move beyond its home base in Taiwan. The company, alongside its customers, is eager to mitigate the risks associated with Taiwan as a potential chokepoint in semiconductor supply, particularly amid rising tensions with China.

Fortunately, TSMC is already in the process of constructing several new factories. Three fabrication facilities are underway in Arizona, with hopes to start high-volume production in early 2025 at the first site. These facilities will utilize advanced process nodes to cater to the vital HPC market. The second and third factories are anticipated to be operational by the end of this decade.

Additionally, TSMC is building facilities in Japan and Europe to further enhance its geographical footprint. The management has plans to invest tens of billions, possibly exceeding $100 billion, in new international factories over the next five to ten years. Investors should closely monitor these developments, as they could help reduce geopolitical risks while testing if profitability can be maintained outside Taiwan.

TSM data by YCharts

Future Prospects Beyond $1 Trillion

TSMC’s financial outlook remains strong, with net revenue increasing by 36% year over year in U.S. dollars last quarter, while the operating margin rose to 47.5%. This resulted in an impressive net income growth of 54.2% for the period. While maintaining such high earnings growth may not be feasible indefinitely, it is reasonable to expect TSMC to achieve double-digit net income growth annually over the next five years, fueled by the AI sector.

However, the question remains: is the stock a wise investment? TSMC shares have surged 170% since the beginning of 2023, with a current price-to-earnings ratio (P/E) greater than 30, exceeding the S&P 500 average. Despite being a better-performing business than the average company in the index, the stock is trading at one of its highest P/E ratios historically. This could expose it to potential risks of valuation corrections.

Investors may feel compelled to buy TSMC after it reached a trillion-dollar market cap. Looking ahead five years, it is likely that TSMC’s market value will surpass current levels. Still, caution is warranted when considering this stock following a dramatic 170% increase in less than two years.

Don’t Miss This Investment Opportunity

Have you ever felt like you missed the opportunity to invest in successful stocks? If so, the following information is worth your attention.

On rare occasions, our expert analysts issue a “Double Down” stock recommendation for companies poised for significant growth. If you believe you missed the chance to invest, now might be the perfect time to act before it becomes too late. The numbers speak for themselves:

• Amazon: If you invested $1,000 when we doubled down in 2010, you’d have $21,365!*
• Apple: If you invested $1,000 when we doubled down in 2008, you’d have $44,619!*
• Netflix: If you invested $1,000 when we doubled down in 2004, you’d have $412,148!*

Currently, we are issuing “Double Down” alerts for three remarkable companies, and this opportunity may not arise again soon.

See 3 “Double Down” stocks »

*Stock Advisor returns as of October 21, 2024

Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Taiwan Semiconductor Manufacturing. 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.