Alphabet(NASDAQ: GOOG)(NASDAQ: GOOGL) is currently the fourth-largest company in the world, with a market capitalization of just over $2 trillion, and it achieved this stellar valuation thanks to its dominant position in the search engine and the digital advertising markets.
Despite the high market cap, Alphabet’s growth hasn’t been all that steady in recent years. The company faces growing competition in the digital ad space, while its artificial intelligence (AI) efforts have run into challenges.
This is probably why analysts expect Alphabet’s earnings to increase at a relatively slower pace of 20% a year for the next five years as compared to the 24% seen in the last five years.
GOOG Revenue (Quarterly) Chart
There are other technology stocks that are clocking faster growth by making the most of the lucrative AI opportunity. In this article, we will take a closer look at one such name that could eclipse Alphabet’s market cap in the next five years.
Taiwan Semiconductor Manufacturing(NYSE: TSM), known popularly as TSMC, is a recent addition to the trillion-dollar market cap club. It is now the eighth-largest company in the world by market cap, and its valuation is just above $1 trillion.
TSMC’s latest results have played a key role in helping it become a trillion-dollar company. The stock surged 10% following the release of its third-quarter results on Oct. 17, with better-than-expected numbers and improved guidance.
The semiconductor foundry specialist reported a 36% year-over-year increase in revenue to $23.5 billion, while earnings shot up 50% year over year in U.S. dollar terms to $1.94 per share.
TSMC now expects to end 2024 with a 30% spike in revenue, up from the earlier expectation of mid-20% growth. More importantly, its status as the largest semiconductor foundry in the world puts it in a position to make the most of the secular growth of the industry it serves. TSMC fabricates chips for Nvidia, Intel, Advanced Micro Devices, Broadcom, Apple, and Qualcomm, among others.
This diverse customer base means that TSMC is set to benefit from multiple fast-growing end markets such as AI data center chips, generative AI smartphones, and personal computers. For instance, the size of the AI semiconductor market could grow to $846 billion in 2035. All the major players tap TSMC’s foundries to manufacture their chips, including market leaders Nvidia and Broadcom.
Apple and Qualcomm booked out TSMC’s advanced chip production capacity until 2026 because both companies want to make the most of the growing demand for AI-enabled smartphones and PCs. So analysts bumped up their growth expectations from TSMC for 2024, 2025, and 2026.
TSM Revenue Estimates for Next Fiscal Year Chart
TSMC dominates the foundry market, with Counterpoint Research estimating that it has a 62% share of the global foundry market as compared to the 13% share controlled by second-place Samsung.
This gives TSMC strong pricing power: It is expected to increase the cost of its semiconductor wafers by 10% next year, and customers have reportedly agreed to the increases, according to Morgan Stanley.
So TSMC should enjoy fatter margins, and it already has a stronger margin profile when compared to Alphabet, which should ideally pave the way for stronger earnings growth.
GOOG Profit Margin Chart
The following chart shows that TSMC’s earnings are expected to grow slightly faster than Alphabet’s in two of the next three years.
TSM EPS Estimates for Current Fiscal Year Chart
In 2026, TSMC is expected to generate $10.15 in earnings per share (EPS); Alphabet’s reading is expected to be just a shade under $10. Analysts expect TSMC’s earnings to increase by 21.5% annually over the next five years, slightly higher than Alphabet’s estimates as mentioned above.
And TSMC’s stronger margins and its leading position in a foundry market that’s benefiting from the booming demand for AI chips could eventually lead to much stronger earnings growth in the long run. Assuming its bottom line increases by 20% in both 2027 and 2028, its earnings could jump to $14.62 per share after five years (using 2026 earnings of $10.15 per share as the base).
Assuming the stock trades at 35 times earnings at that time (in line with its current earnings multiple but at a discount to the U.S. technology sector index’s price-to-earnings ratio of 47), share prices could hit $512. That would be a 156% jump from where the stock is right now, which would send its market cap to $2.66 trillion after five years.
That will be enough to easily surpass Alphabet’s current market cap and may be enough to top Alphabet’s market cap in five years, especially if Alphabet continues to underperform the broader stock market over concerns about how it is managing stiff competition in the digital ad and AI markets.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Apple, Nvidia, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and Intel and recommends the following options: short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.
