1 Surprising Way Taiwan Semiconductor Manufacturing (TSMC) Makes Money

Developments in artificial intelligence (AI) over the past few years have caused a paradigm shift in the technological landscape. For example, nine of the top 10 companies measured by market cap have clear ties to this once-in-a-generation technology.

One recent addition to the top 10 list is Taiwan Semiconductor Manufacturing (NYSE: TSM), also known as TSMC. The company boasts the world's most advanced chip foundry and, as such, produces roughly 90% of the world's most advanced semiconductors, including those for high-end computing and AI.

This has fueled a resurgence in interest in the once-stodgy chipmaker, as new shareholders have flocked to the stock. In fact, the unprecedented demand for high-end processors and TSMC's market-leading technology have helped the company add more than $1 trillion in market cap since the dawn of AI in early 2023.

Image source: Taiwan Semiconductor Manufacturing.

New research from The Motley Fool provides granular detail into how TSMC makes money. Not surprisingly, the lion's share of the company's revenue comes from the sale of chips used for high-performance computing (HPC). This includes high-end processors used in data centers and cloud computing to facilitate the training and running of AI models. The segment accounted for 57% of TSMC's third-quarter sales.

Yet HPC only became the company's dominant segment in early 2022. Investors might be surprised to learn that, until then, TSMC's biggest moneymaker was the smartphone segment. In recent years, sales of smartphones have lagged, as a perfect storm of economic conditions encouraged users to hang on to their existing phones a bit longer. Surging inflation began in 2021 and rose to record levels, slowing consumer spending and punishing the smartphone market, then TSMC's biggest business.

The smartphone market has begun to recover, and smartphones overall represented 30% of TSMC's third-quarter sales. This is thanks in part to the success of Apple's iPhone 17. Just last week, the company reported a quarterly revenue record that grew 8% year over year to $102.5 billion. CEO Tim Cook predicted that the December quarter would be the biggest in its history. Apple has historically been one of TSMC's biggest customers, accounting for 24% of its revenue in 2024. This suggests that TSMC's legacy smartphone segment has begun to heat up.

Taking a step back helps provide much-needed context. In the third quarter, TSMC generated revenue of $33.1 billion, up 41% year over year and 10% sequentially, while earnings per American depositary receipt (ADR) soared 39% to $2.92.

Despite its multiple growth drivers, TSMC is attractively priced, selling for 30 times trailing-12-month earnings, a discount compared to a multiple of 31 for the S&P 500.

Danny Vena has positions in Apple. The Motley Fool has positions in and recommends Apple and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.