As of January 17, there were 10 public companies in the world with valuations of at least $1 trillion. With the exception of Warren Buffett’s investment center, Berkshire Hathawayevery stock worth trillions of dollars plays a leading role in the ongoing artificial intelligence (AI) revolution.
After gaining 110% over the past year, chip stock Semiconductor manufacturing in Taiwan(NYSE:TSM) joins an important client, Nvidiain the trillion dollar club. With a current price of $213, TSMC is trading near a 52-week high.
Below, I’ll explore why TSMC might initiate a stock split sooner rather than later and how such a move could impact investors.
The chart below illustrates TSMC’s market cap gains over the last year. In just 12 months, the company’s valuation has nearly doubled from around $500 billion to over $1 trillion today. Given this degree of valuation expansion in such a short period of time, a stock split could be a reasonable move to make now.
When a company splits its stock, the number of shares outstanding increases. For example, when Nvidia completed a 10-for-1 stock split a few months ago, the number of shares outstanding increased tenfold while the company’s share price was divided by 10. In total, stock splits do not change the valuation of a business.
Since splits result in an increase in the number of shares outstanding, it takes a lot more buying activity to drive a stock’s price up. This makes stock splits a potential signal of an optimistic management team and its confidence in the company’s long-term prospects. Pursuing a stock split could indicate that management believes the stock will continue to rise, although unlocking those gains may become more difficult to achieve due to a higher number of shares outstanding.
TSMC occupies a unique position in the chip field. The company specializes in sophisticated manufacturing processes that bring chips from Nvidia, Advanced microdevicesand many others to life.
Industry research suggests that investments in AI infrastructure will run into the trillions in the coming years. And when it comes to GPUs specifically, the total addressable market is expected to be nearly $300 billion by the end of the decade. Considering Nvidia, AMD and many hyperscalers including Microsoft, Amazon, AlphabetAnd Metaplatforms are all bringing more chipware to market, I see TSMC seeing AI tailwinds for several years to come.
But at over $200 per share, isn’t TSMC stock starting to look expensive? Well, not so fast.
When it comes to valuation, looking at the stock price alone won’t tell you much. If you see TSMC’s stock price is $200 and Nvidia’s stock price is $140, that doesn’t necessarily mean TSMC is the more valuable company. In this example, Nvidia’s market cap is $3.4 trillion, almost triple that of TSMC.
Image source: Getty Images.
To determine if TSMC stock is expensive, you’ll need to look at valuation multiples. In the chart below, you can see that the stock’s forward price-to-earnings (P/E) ratio of 23.4 is almost identical to the average forward P/E for the stock. S&P500(INDEXSNP: ^GSPC).
These dynamics suggest that investors view a position in TSMC as having the same upside potential as the market as a whole. When you look at TSMC this way, the company’s sky-high valuation and high stock price don’t seem that expensive in reality. Additionally, given the benefits of increased investment in AI capital spending over the next few years, I think it is very likely that TSMC stock will ultimately receive a notable premium over S&P 500.
For all these reasons, I view TSMC as an attractive buy-and-hold opportunity for the long term – regardless of a potential split.
Before buying Taiwan Semiconductor Manufacturing stock, consider this:
THE Motley Fool Stock Advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now…and Taiwan Semiconductor Manufacturing was not one of them. The 10 selected stocks could produce monster returns in the years to come.
Consider when Nvidia made this list on April 15, 2005…if you had invested $1,000 at the time of our recommendation, you would have $843,960!*
Equity Advisor provides investors with an easy-to-follow plan for success, including portfolio building advice, regular analyst updates, and two new stock picks each month. THEEquity Advisorthe service has more than quadrupled the return of the S&P 500 since 2002*.
Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, 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. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Adam Spatacco holds positions at Alphabet, Amazon, Meta Platforms, Microsoft and Nvidia. The Motley Fool holds positions and recommends Advanced Micro Devices, Alphabet, Amazon, Berkshire Hathaway, Meta Platforms, Microsoft, Nvidia and Taiwan Semiconductor Manufacturing. 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.
