Taiwan Semiconductor’s Crucial Role in the Tech World

Taiwan Semiconductor Manufacturing is the world’s largest chip foundry company. It is responsible for generating the nuts-and-bolts technology that enables much of the innovation and progress that has come to define society today.  Without it, much of the progress of the last several years would not have been feasible, meaning that it could be argued that Taiwan Semiconductor Manufacturing is one of the world’s most important companies.

Recently, the company reported outstanding quarterly earnings, and the CEO revealed a revelation during the quarterly conference call: the results in one sector of the chip market have blown away expectations. That sector is AI.

The Rise of AI Chips: A Game-Changing Market

Taiwan Semiconductor’s products are used in all sorts of devices, but most notably, some of its biggest clients are Apple and Nvidia, the world’s two largest companies. These two would grind to a halt without TSMC’s chips, which shows how critical TSMC is. Both companies are participating in the artificial intelligence (AI) arms race, which should boost TSMC’s sales in the AI chip space.

The manufacturing company predicted this heavy-leaning trend and projected that AI chips would grow at a 50% compound annual rate for five years. Since AI chips made up about 6% of total revenue then, it seemed like an ambitious, perhaps too optimistic projection when they announced it in Q2 2023.

However, it turns out the projection wasn’t ambitious or optimistic enough. As AI has been implemented into industries across the globe over the course of the last year, production needs have skyrocketed. In its Q3 2024 conference call, CEO C.C. Wei had this to say about AI chip demand:

“So, just a year-and-a-half after it gave the projection that AI chips would make up a ‘low-teens percentage’ in five years, it is on track to make up a ‘mid-teens percentage.’ This shows the incredible demand for AI chips that go into graphics processing units (GPUs), AI accelerators (custom chips that the big tech companies utilize for themselves), and CPUs.”

Earnings Boost and Market Response

Thanks to AI revenue tripling, management increased its full-year revenue forecast to rise by 30% year over year. As one can clearly see, AI chips are having a huge effect on Taiwan Semiconductor. 

After this earnings report and call, TSMC’s stock price rose about 10% the following day. However, since that report, the stock has given up many of those gains and is only up around 4% now. So, investors can have more confidence in buying the stock now that the bump isn’t as high as it used to be. The market isn’t blind to Taiwan Semi’s success and has given it a premium price tag.

The stock trades for 31 times trailing earnings and 22 times 2025 earnings. While the trailing earnings price tag is a bit steep, the forward-looking one isn’t so bad as it accounts for the massive growth TSMC is expected to undergo next year. 

Long-Term Outlook: Sustaining the AI Revolution

In 2020 and 2021, TSMC sustained its high valuation because of a chip boom brought about by massive demand for consumer devices. The COVID pandemic heavily influenced this, and when demand was fulfilled, Taiwan Semiconductor’s stock crashed along with the rest of the market. “The demand for AI chips will likely become more sustainable over the long term, as we’re just scratching the surface of the computing power needed to make serious gains in this industry,” Wei said.

Taiwan Semiconductor is one of the best ways to invest in the chip industry and an ancillary way to invest in AI.