This Undervalued Stock Could Join Alphabet in the $2 Trillion Club

The trillion-dollar market cap club is an exclusive one. There are currently only seven companies in the world that have surpassed this milestone. Litter, MicrosoftIt is Nvidia reign supreme, sitting in the illustrious $3 billion club, but Alphabet is the only company in the $2 trillion club — for now.

With a market capitalization of just over $880 billion, Semiconductor Manufacturing in Taiwan (NYSE:TSM) (TSMC) still has a long way to go to reach $2 trillion, but the milestone is well within reach. And it may not be too far away, either.

Since its listing on the New York Stock Exchange in October 1997, TSMC has averaged an annual return of about 13.5%. Over the past decade, it has been even more impressive, averaging an annual return of more than 23%. Much of that can be attributed to the 61% gain it has made over the past 12 months, but even more modest returns could put TSMC in the $2 trillion club.

It would take just over 8.5 years to go from a market cap of $880 billion to a market cap of $2 trillion, with an average annual return of 10%. Given TSMC’s growth prospects, I believe this is achievable.

TSMC is a major player in the technology ecosystem

TSMC is the largest and most important semiconductor company in the world. It established the foundry model, where instead of manufacturing semiconductors for general sale, it manufactures semiconductors for a company’s specific needs.

This model and the quality of TSMC’s semiconductors have made it the preferred choice of some of the world’s best companies, including Apple, Nvidia and Tesla. Semiconductors are the basis for many electronics and applications we use today. They’re in iPhones, graphics processing units (GPUs), cars and even medical devices.

You could make a strong argument that without TSMC, many of these items and applications we love would suffer in quality. That’s why it remains the best choice, despite other companies like Intel adopting the same casting model.

TSMC is at the beginning of an AI-fueled revenue surge

For a while, TSMC’s financial performance has been dependent on its smartphone business, and that has caused it to go through a tough patch as global smartphone sales have slowed. Smartphones will remain a major part of TSMC’s business, but it is getting some help from its high-performance computing (HPC) segment, which includes revenue related to artificial intelligence (AI).

In Q2, TSMC’s revenue grew nearly 33% year-over-year to $20.8 billion, with HPC accounting for 52% of it. This continues a trend that has occurred in recent quarters:

Quarter

Percentage of HPU revenue

Percentage of revenue from smartphones

Data source: TSMC.

The story continues

TSMC’s semiconductors are essential for the GPUs that power most data centers. Without these data centers, it would be virtually impossible to store and transport the data needed to train the AI ​​applications that have become prominent in the last two years. So it all starts with TSMC’s semiconductors.

The second-quarter success prompted TSMC to raise its full-year revenue guidance to well above the 20 percent range. It also expects its capital expenditures to be between $30 billion and $32 billion, after previously estimating them to be between $28 billion and $32 billion. This potential increase in investment will help better position it to handle the increased demand caused by the rise of AI.

TSM Capital Expenditure Chart (Annual)

TSMC’s valuation makes it an attractive option

Despite rising more than 57% this year, TSMC stock is still valued at a reasonable level. Its forward price-to-earnings (P/E) ratio is around 20.5, well below the 23.7 P/E ratio it has averaged over the past five years.

TSM P/E Ratio Chart (1 Year Forward)

TSMC may face some geopolitical hurdles as it may find itself embroiled in US-China trade tensions and export restrictions, but these are issues that TSMC’s CEO assured will not impede the company’s growth and expansion plan.

Given the expected growth in demand for AI and the additional revenue that could come from a recovery in the smartphone market (especially since Apple’s iPhone sales are expected to rebound with the addition of Apple Intelligence to its next-generation models), there’s reason to believe that TSMC could join the $2 trillion club within the next decade.

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Alphabet executive Suzanne Frey is a member of The Motley Fool’s board of directors. Stefan Walters (Portuguese) has positions in Apple and Microsoft. The Motley Fool has positions in and recommends Alphabet, Apple, Microsoft, Nvidia, Taiwan Semiconductor Manufacturing, and Tesla. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

This Undervalued Stock Could Join Alphabet in the $2 Trillion Club was originally published by The Motley Fool

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