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Shares of Taiwan Semiconductor Manufacturing (NYSE: TSM) received a big boost last week after the company, which is popularly known as TSMC, reported a terrific surge in its monthly revenue for October.

The Taiwan-based foundry giant reported October revenue of 243.2 billion Taiwanese dollars ($7.7 billion), up 16% year over year. The increase was particularly impressive on a sequential basis, as TSMC’s revenue jumped almost 35% month over month. Investors were overjoyed to see the company’s healthy growth, as it has struggled to grow its revenue in 2023 so far due to a weak smartphone market.

TSMC’s revenue has dropped 6% year over year in the first nine months of 2023 to NT$1.54 trillion ($49.7 billion). But the company’s latest monthly revenue report suggests that it could end the year strongly, and even sustain its momentum for a long time to come.

Let’s see what powered TSMC’s latest revenue surge.

Apple may have powered its sales surge

Apple is reportedly TSMC’s largest customer, accounting for 23% of its revenue in 2022. As Apple recently released the latest generation of its iPhones, the tech giant must have ideally placed more orders for chips that TSMC makes for it.

Apple’s iPhone 15 Pro and Pro Max models are powered by a 3-nanometer (nm) chip. TSMC management pointed out on the company’s October earnings conference call that it is witnessing a “strong ramp of our industry-leading 3-nanometer technology,” suggesting that the company was increasing production of these chips in preparation for Apple’s iPhone launch.

More importantly, TSMC estimates that the sales of its 3nm chips will continue to ramp up in the fourth quarter, and management remains confident that this node could drive long-term growth for the company. TSMC got 6% of its revenue from selling 3nm chips last quarter, but it won’t be surprising to see this technology move the needle in a bigger way for the company.

After all, TSMC estimates that the market for 3nm chips could be worth a whopping $1.5 trillion in five years of entering volume production. One reason why that may be the case is because of the advantages of smaller process nodes over larger ones in terms of computing performance, power consumption, and the real estate they occupy.

That’s why it won’t be surprising to see 3nm chips being deployed for powering artificial intelligence (AI) servers, which need a lot of computing power, and need to be power-efficient at the same time so that they can run cooler. Reports suggest that AI chip leader Nvidia is reportedly going to adopt TSMC’s 3nm process as the foundation for its Blackwell architecture to manufacture its next-generation AI processor in 2024.

It is worth noting that Nvidia is already a TSMC customer, as its highly popular H100 AI graphics processing unit (GPU) is based on the latter’s 5nm manufacturing node. Nvidia’s data center GPUs, which are used for powering AI servers, have witnessed massive performance jumps each time the company has moved to a smaller process node. As a result, it won’t be surprising to see it adopting TSMC’s 3nm node that Apple currently uses to make more powerful processors.

Moreover, TSMC is having a hard time keeping up with AI-related demand. CEO C.C. Wei pointed out on the company’s earnings call that TSMC has “a capacity limitation to support” AI demand. As a result, the company is busy expanding its capacity to produce AI chips. Wei says that TSMC is on track to more than double its advanced packaging capacity by the end of 2024 because of “very high demand” from a particular customer. That customer is likely Nvidia, as the latter has been placing more orders for TSMC chips.

Nvidia reportedly produced 6% of TSMC’s top line last year. However, it won’t be surprising to see it becoming a bigger customer thanks to AI, and that could enable TSMC to make the most of the huge end-market opportunity in 3nm chips.

How much upside can investors expect?

TSMC’s top line is anticipated to grow at a healthy pace over the next couple of years. As the following chart shows, its top line could inch closer to $100 billion by 2025.

TSM Revenue Estimates for Current Fiscal Year data by YCharts

Assuming the company does hit the $96 billion revenue that’s being estimated by Wall Street analysts and trades at its five-year average sales multiple of 8.5 at that time, its market capitalization could increase to $816 billion in the next three years. That would be a 59% increase from current levels. Given that TSMC is trading at a relatively cheaper 7.6 times sales right now, investors are getting a good deal on the stock.

What’s more, TSMC is cheaper than the likes of Nvidia considering the impressive growth that it’s on track to deliver. That’s why investors looking to buy an AI stock before it steps on the gas should consider buying it before it becomes expensive.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool recommends Apple, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.

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