Get to know the latest artificial intelligence (AI) chips and join Nvidia in the $1 trillion club

Nvidia (NVDA 0.78%) rose to the $1 trillion mark in May 2023 as the company benefited from rising spending on artificial intelligence. Since then, the chipmaker has more than tripled its value, becoming the second most valuable company in the world, right behind it Apple.

The rest of the $1 trillion club consists of some of Nvidia's biggest customers, the “hyperscalers” that are building massive data centers for training and operating generative AI. But the newest member of the club is actually an important part of Nvidia's supply chain. It's not just Nvidia, however. This semiconductor company works closely with almost every technology company in the $1 trillion club and is now finally a member itself.

The latest artificial intelligence (AI) chip in the $1 trillion club is Taiwan Semiconductor Manufacturing Company (TSM -2.46%). For this reason, $1 trillion could just be a milestone for the stock's further rise into the ranks of mega-caps.

Image source: Getty Images.

“By far the best in the world”

Taiwan Semiconductor, or TSMC, is a chip manufacturer, also known as a foundry or fab. It is the first choice for many chip designers, attracting over 60% of industry spending. There are good reasons for this. TSMC's technology is significantly ahead of almost all competitors.

At an investor conference last month, Nvidia CEO Jensen Huang said: “We are leaving TSMC because it is the best in the world. And it’s not the best in the world by a small margin, it’s the best in the world by an incredible margin.”

This is evident from TSMC's latest financial results for the third quarter. The company reported 39% year-over-year revenue growth. Gross margin increased to 57.8% from 54.3% a year ago, and net profit rose 54.2% as a result. The driving force behind these outstanding results is TSMC's technological lead. This makes it an essential partner for anyone looking to print advanced chips for AI (like Nvidia's GPUs) or smartphones (like Apple's iPhone).

“Our third quarter business was supported by strong smartphone and AI-related demand for our industry-leading 3nm and 5nm technologies,” CFO Wendell Huang wrote in the earnings release.

The AI ​​story may just be beginning

Management expects AI chip sales to more than triple in 2024, but the segment will account for only a mid-teens percentage of TSMC's total revenue this year. TSMC still has a long way to grow in the AI ​​space and is investing to take advantage of the opportunities that arise.

Nvidia works with TSMC to print its chips, but it's not the only AI chipmaker to use the leading factory's advanced technology. Microsoft, alphabet, Meta, BroadcomAnd Advanced micro devices They all commission TSMC to develop AI accelerator chips. Apple has been using TSMC for years to develop its chips for the iPhone and iPad, and more recently the Mac.

In other words, no matter how the future of AI data centers, large language model training, and AI inference unfolds, TSMC will be a big winner.

Management has increased its capital expenditure expectations for 2024 to more than $30 billion and expects to spend even more in 2025. Research and development spending also rose 11.4% year-over-year in the most recent quarter.

Both are key to TSMC's continued success. As by far the largest foundry in the world, it is able to spend more on machinery and technology while developing its technological capabilities than any other competitor. This ensures that the company maintains its position as a technology leader, which in turn leads to lasting relationships with the world's largest customers. This virtuous circle is a huge competitive advantage for TSMC that is difficult to overcome.

A trillion dollars could be just the beginning

While TSMC shares have more than doubled in 2024, there is still room for the stock to rise.

At the current share price, the company trades at just over 25 times analyst estimates for 2025 earnings. And that's before they've had a chance to update their models with the latest results and guidance from management. Over the next five years, TSMC is poised to grow its bottom line by about 20%. AI spending remains robust and the company is able to maintain its high gross margin due to strong utilization even as the next generation of technology comes online. This level of growth more than justifies the current earnings multiple.

The most attractive thing about the company is that it is protected from future changes in the industry. Regardless of who develops the chips needed for data centers and smartphones, TSMC is sure to capture most of that business thanks to the virtuous circle described above. Given management's stellar performance in recent years amid the AI ​​boom, the future continues to look bright for the newest member of the $1 trillion club.