It's the world of TSMC. the rest of us just live in it. 2024 will be a positive year for Taiwan semiconductor manufacturing (TSM -2.71%)the world's leading manufacturer of advanced semiconductors.

The company has begun a major expansion outside its home market of Taiwan because of geopolitical concerns with China, prompting it to invest billions in factories in Arizona. Last week the company announced a major milestone with these new factories in the US.

Here's why TSMC's latest update is important for its continued business development and what it could mean for the stock in the long term.

Chip yields and why they matter

TSMC's Arizona factory is being prepared for commercial production in 2025. As the plant ramps up, the company is testing the yield of semiconductor wafers pumped out of its manufacturing process. These wafers then become advanced computer chips and are therefore crucial to companies like… Apple or Nvidia and the artificial intelligence (AI) revolution. The higher the yield, the more of each wafer is used in the manufacturing process. Essentially, it's a measure of how much of each wafer is functioning properly.

Last week, TSMC reported that the company had 4% higher yields at its Arizona plant compared to its factories in Taiwan. This is big news for the company. Why? Investors and analysts doubted that TSMC's factories would be as successful outside Taiwan, long the beating heart of the semiconductor market. Producing advanced semiconductors is no easy task and requires teams of scientists, engineers, advanced technologies and institutional know-how built over decades.

Now TSMC has allayed fears that this process may not be repeated in the United States. Higher yields mean TSMC can sell more semiconductors per unit of production while keeping costs the same. In other words, it should lead to higher profits, all other things being equal. If TSMC were unable to replicate its Taiwan revenues in Arizona, there would be a risk that its profit margins would decline significantly as all of these new facilities come online. These fears are now allayed.

The demand for AI is not slowing down

These Arizona facilities – along with others in Japan and Europe – will be important to the AI ​​market over the next five to 10 years. TSMC may currently be the only company capable of building the world's most advanced semiconductors for companies like Nvidia, which is the main supplier for all data center spending associated with the AI ​​boom.

Put more simply, as AI spending increases, so does TSMC's revenue. All of these new factories are designed to help the company keep up with seemingly insatiable customer demand. For example, TSMC's high-performance computing (HPC) segment grew 11% quarter-over-quarter last quarter and now accounts for 51% of total revenue. Just two years ago, in the same quarter, the HPC segment accounted for just 39% of total revenue. HPC invests in advanced semiconductors for data centers, i.e. in AI.

Investors should keep a close eye on the HPC segment as it now accounts for the majority of TSMC's consolidated revenue and is growing like wildfire. If data center and AI spending continues to boom, TSMC's revenue will likely continue to grow rapidly. Since wafer yields are almost at the same level as in Taiwan, profit margins are likely to remain high. Last quarter, operating margin was a robust 47.5%, showing how valuable TSMC's advanced computing products have become.

ASML PE Ratio data from YCharts

A rising win ratio means high expectations

With these booming sales and profits, TSMC stock began to rise. In the last year alone, shares have risen over 100% and briefly traded at a market cap of over $1 trillion.

These gains have brought the stock's price-to-earnings (P/E) ratio to 31, which represents a premium valuation and is slightly above S&P 500 Index average. Some investors would turn away from TSMC stock due to its high P/E ratio. However, I think that the forest is missing for the trees here. Yes, TSMC has a high P/E ratio, but the company has proven over the long term that it can grow earnings quickly and has a big tailwind in the form of AI spending. Over the past 10 years, the company's earnings per share (EPS) have cumulatively increased by nearly 300%.

Despite this high valuation, I think TSMC stock is a buy at these prices if you believe in AI for the long term. One of the best companies in the world continues to expand its lead and is now showing that it can replicate its manufacturing process in other regions.