NVIDIA (NVDA 1.40%) Nvidia’s stock price has skyrocketed due to huge investments in artificial intelligence (AI) by major technology companies. The company’s graphics processing units (GPUs) are essential infrastructure for training large language models, the backbone of generative AI. As more companies invest in AI development, Nvidia is a big beneficiary.

The chipmaker entered the $1 trillion club last summer and crossed the $2 trillion mark in February. After a brief foray into the $3 trillion range, the stock is just below that threshold at the time of this writing.

But Nvidia is not the only chipmaker riding the wave of AI spending. Several others have seen big increases in business by expanding their data centers, including Broadcom (AVGO -0.25%). Broadcom’s networking and AI accelerator chips have proven increasingly valuable as data centers expand rapidly. Both help big technology companies get the most out of their investments and have given the chipmaker a $750 billion valuation.

The next semiconductor stock to join Nvidia in the trillion-dollar club won’t be Broadcom, however. Investors should examine the supply chain to find the next chipmaker to reach a valuation above a trillion dollars: Taiwanese semiconductor manufacturing company (TSM 0.33%).

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This company wins when chipmakers compete

Taiwan Semiconductor Manufacturing Company (TSMC) is the largest chipmaker in the world, accounting for around 60% of all foundry spending, and for good reason: it has the most advanced chipmaking processes in the world, allowing it to produce more powerful and energy-efficient chips for its customers, both of which are extremely important for AI and other areas such as smartphones.

Importantly, TSMC’s next competitor is unlikely to dislodge the company from its position. TSMC’s size is a huge advantage. With such high revenues, the company can invest more in research and development, ensuring it stays at the forefront of manufacturing processes.

Major customers such as Nvidia, Broadcom, Apple (AAPL 0.59%)and others contract TSMC to produce the chips they design for sale and use in their products. Almost anyone who wants to compete with these companies is likely to contract with TSMC as well. So even if Nvidia or Broadcom loses market share to a competitor, TSMC is unlikely to lose business overall. In fact, competition for TSMC’s limited resources is great for its business.

This is reflected in its latest financial reports. TSMC posted a new monthly revenue record in July, when it took in 257 billion New Taiwan dollars ($8 billion), up 45% from the same period last year. In its most recent quarter, the company reported a 40% increase in revenue (33% in USD) and a 36% increase in net profit. Two-thirds of its revenue came from its most advanced chip processes.

Much more growth is planned

TSMC should continue to benefit from several catalysts over the next few years, starting with management’s third-quarter outlook.

The company expects revenue for the quarter to be between $22.4 billion and $23.2 billion, which is already above July’s revenue. On average, the forecast represents growth of 32 percent year-on-year. In addition, the company expects gross margin to increase to between 53.5 and 55.5 percent. This indicates that the company is demonstrating pricing power in the face of increasing customer demand.

This demand is likely to continue to grow as major technology companies announce plans to invest heavily in AI server capacity. Meta-platforms said it expects significant growth in capital expenditure (Capex) in 2025, despite setting new records for capital expenditure this year. alphabetManagement said the cost of overspending is far less than the cost of underinvesting in AI, so investors should expect significant capital investment here as well. Similar sentiments can be found across the technology space.

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Many investors are expecting strong results from the next version of the Apple iPhone, which will support new Apple AI features. Many existing iPhone users will not be able to take advantage of Apple’s latest AI features due to hardware limitations, which could lead to a significant round of upgrades next year. Strong iPhone demand means strong demand for TSMC’s chips.

TSMC is preparing for the increased demand. The company lowered its capital expenditure forecast for the year to $30 billion to $32 billion and raised the lower limit from $28 billion. The increased spending forecast was accompanied by the following comment from management: “At TSMC, a higher level of capital expenditure always correlates with the higher growth opportunities in the following years.”

The share still has room to rise

Despite the market capitalization of $875 billion, the stock appears undervalued at today’s price. Shares currently trade at a price-to-earnings (P/E) ratio of just 26.5. However, strong revenue growth and margin improvements can lead to earnings growth of over 20% per year in the foreseeable future. Analysts currently expect earnings growth of 21.5% per year over the next five years.

This makes TSMC one of the most attractive AI chipmakers on the market. The company is currently about 14% away from the trillion-dollar club, so it shouldn’t be long before it reaches this milestone.