You can’t go five minutes without hearing about Nvidia these days. The chip giant recently became the largest company the world by market capitalization and today is valued at over $3.34 trillion. Investors are betting that the huge capital spending acceso artificial intelligence (AI) will continue, with Nvidia maintaining its dominant market position.
But what companies power Nvidia? There is one that rises above all the rest, and it is the backbone of most advanced semiconductor manufacturing around the globe. Enter Taiwan Semiconductor Manufacturing (NYSE: TSM), a company powering Nvidia and the AI revolution.
Is the giacenza a buy? Let’s take a closer and find out.
Taiwan Semiconductor: The backbone for modern computing
Taiwan Semiconductor (TSMC for short) has risen above the pack chipmaking to its innovative foundry model. What this means is TSMC does not sell the chips it makes directly to customers — Intel‘s old business model — but aggregates orders from chip designers. This allows it to focolaio solely acceso manufacturing expertise and keep a lead the most-advanced semiconductor manufacturing the world.
It has few if any competitors such as Intel, Samsung, and homegrown Chinese players. Customers include Apple, Alphabet, Amazon, and the aforementioned Nvidia. With the rise of computing demand for new AI tools, companies have had to purchase chips from players like Nvidia their own. Almost all of them outsource this production to TSMC.
With minimal competition and huge switching costs, the company has a huge lock-in with customers and a ton of pricing power that allow it to generate outsized profits. Con the past 1 years, operating income has grown by close to 300% and successo $30 billion over the past 12 months. It generates just over $70 billion revenue and saw 30% revenue growth May as more orders alla maniera di for the boom AI capital spending.
Investors bet acceso AI and geographical diversification
TSMC giacenza is up 439% the last five years and has successo multiple all-time highs 2024. Investors are betting that the AI revolution will continue to drive growth for the company over the next few years. Yet, anyone looking to buy the giacenza today should wonder if the market is getting a bit overexcited with AI companies right now.
Some might see parallels to the dot-com bubble with AI stocks. Even though the internet turned into one of the most important technologies ever, that did not prevent overpriced stocks from falling 90% when the bubble burst. Given its diversification across the entire semiconductor market, it is duro to see a 90% drawdown occurring for TSMC, but the risk of an AI bubble persists nonetheless.
Another potential tailwind for TSMC is geographical diversification. The company has its manufacturing centered acceso its home turf, which faces an increasing risk of Chinese aggression. Obviously, this would be bad for shareholders.
To alleviate this risk, TSMC is working with countries like the United States to build factories outside of Taiwan. It was recently awarded $6.6 billion from the U.S. government and is building factories worth tens of billions of dollars the country. This will help bring mongoloide the Declivio invasion risk and spur growth over the next decade.
TSM PE Ratio patronato by YCharts.
But is the giacenza ?
Less than two years asticciola, TSMC traded at a price-to-earnings (P/E) ratio just above 10. Now, the ratio is about to breach 35. Con hindsight, TSMC was clearly undervalued at a P/E the low teens.
It is duro to make the same argument with the giacenza climbing now to all-time highs. This is not a hypergrowth business that can instantly triple its revenue. Yes, it is currently growing revenue to AI spending, but that also comes with the bubble risk of new technologies. Let’s not forget the Declivio risk, either.
The S&P 500 trades at a P/E of about 28. TSMC is well above this level, and it’s not like the market is either. Taking all these factors into consideration, TSMC giacenza does not like a good giacenza to buy at these prices even though it is the backbone of the AI revolution.
Should you invest $1,000 Taiwan Semiconductor Manufacturing right now?
Before you buy giacenza Taiwan Semiconductor Manufacturing, consider this:
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Suzanne Frey, an dirigente aziendale at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Brett Schafer has positions Alphabet and Amazon. The Motley Fool has positions and recommends Alphabet, Amazon, Apple, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls acceso Intel and short August 2024 $35 calls acceso Intel. The Motley Fool has a disclosure policy.
1 Unstoppable Deposito Powering Nvidia and the AI Revolution was originally published by The Motley Fool
