Taiwan Semiconductor Manufacturing: A Closer Look at Its Recent Surge and Potential Stock Split

The shares of Taiwan Semiconductor Manufacturing (TSMC) have seen remarkable growth, surging over 100% in value over the past year. This impressive gain has elevated the chip giant into the elite trillion-dollar club, joining a select group of companies coveted for their enormous market valuations.

As of January 17, there are currently ten public companies globally with market values exceeding $1 trillion. Apart from Berkshire Hathaway, known for its boss Warren Buffett, each of these trillion-dollar entities is significantly involved in the booming artificial intelligence (AI) sector.

Breaking into the trillion-dollar club, TSMC's stock price has reached approximately $213, nearing its 52-week high, alongside major client Nvidia, which has also enjoyed unprecedented growth during this period.

Potential for a Stock Split

Based on TSMC's market cap growth depicted in recent charts, the company's valuation has effectively doubled from around $500 billion to upwards of $1 trillion in just one year. Such rapid escalation might prompt TSMC to consider a stock split as a viable option to maintain steady growth.

A stock split occurs when a company increases its number of outstanding shares, which proportionately divides the share price. For instance, after Nvidia conducted a 10-for-1 stock split, its shares multiplied by ten while the price fell by the same ratio. Notably, this process does not alter the overall valuation of the company.

As the volume of shares increases, it often takes more substantial buying activity to raise the stock price further. Thus, a stock split could demonstrate management's confidence in the company's ongoing success and a belief that the stock will continue to appreciate in value, albeit with a larger base of shares in circulation.

Why Maintain Current Strategy?

TSMC uniquely occupies a pivotal role within the semiconductor industry. Focused on advanced fabrication technologies, TSMC manufactures chips for various companies, including Nvidia and Advanced Micro Devices, which are essential players in the AI domain.

Industry experts predict investments in AI infrastructure could soar into the trillions over the next few years. The GPU (Graphics Processing Unit) market alone is expected to grow to nearly $300 billion by the decade’s end. With companies like Microsoft, Amazon, Alphabet, and Meta Platforms also ramping up their chip production, TSMC is likely to benefit from sustained AI-related performance for years to come.

At a share price exceeding $200, some might wonder if TSMC's stock appears to be becoming expensive. However, this perspective can be misleading without a thorough valuation analysis.

Comparing stock prices alone—say, TSMC's $200 against Nvidia's $140—doesn't offer a complete picture. Nvidia's market cap stands at around $3.4 trillion, almost three times that of TSMC, revealing the complexities behind such comparisons.

Analyzing TSMC as a Buy Opportunity

To evaluate whether TSMC's shares are overpriced, investors should consider valuation multiples. Currently, TSMC's forward price-to-earnings (P/E) ratio sits at 23.4, closely aligning with the average forward P/E ratio for the S&P 500.

This aligning suggests that investors view TSMC as having similar growth potential compared to the broader market index. The significant increases in TSMC’s value, when viewed from this lens, may not appear as costly. Furthermore, with the expected rise in investments associated with AI capital expenditures, it’s realistic to anticipate that TSMC shares could eventually command a premium above that of the S&P 500.

In conclusion, TSMC presents a compelling investment opportunity worth considering for long-term growth, regardless of the possibility of a stock split.

investment, technology, market