(Bloomberg) -- Taiwan Semiconductor Manufacturing Co. is close to reclaiming a spot in the world’s 10 most-valuable companies, thanks to a $42 billion rally Thursday fueled by optimism about artificial intelligence.

Investors have been piling into TSMC, the critical supplier of chips used in AI processors, ahead of sector heavyweight Nvidia Corp.’s results next week. TSMC’s shares surged almost 8% in Taipei on Thursday, lifting its market value to $575 billion — which ranks it 13th largest globally. That put the stock within a $60 billion market-cap distance from the likes of Visa Inc., Broadcom Inc. and Tesla Inc., overtaking which it would rejoin the top 10 club after a brief spell there in 2020.   

TSMC shares have risen more than 30% since late September thanks to AI-fueled optimism, and there’s potential for further gains as well. Last month, executives at the main chipmaker to Apple Inc. and Nvidia said they expect a return to solid growth this quarter amid signs of recovery in smartphone and computing demand. Nvidia’s earnings due Feb. 21 US time may offer yet another catalyst.

TSMC Gains $42 Billion to Pass Visa as Investors Bet on AI Boom

“The surge in TSMC’s stock price mirrors investor optimism about the future growth prospects of AI technology,” said Bloomberg Intelligence analyst Charles Shum. “The company is the most critical supplier of Nvidia’s AI chips,” he added.

Not everything points to a further rally. The recent advance has put the stock in overbought territory, a technical hurdle. Any signs of trouble in the AI space or disappointment from Nvidia’s earnings might also send the shares downward.

But TSMC has a lot of fans. Morgan Stanley lifted its target price on the stock, and expects the market to boost its valuation. The stock also has the highest recommendation consensus rating among global semiconductor manufacturers with market value of over $20 billion, according to Bloomberg-compiled data. 

Option traders predict the gains will continue — the number of outstanding bullish contracts is close to a record high in the US, according to data compiled by Bloomberg. 

Valuation also doesn’t appear demanding for TSMC, with the stock trading at 17 times forward earnings, below its five-year average of 18 times and 27 times for the Philadelphia Semiconductor Index.

“We forecast TSMC will generate more meaningful revenue from AI semis and believe its strategic value to the global AI supply chain is growing, which will help drive the stock to re-rate,” Morgan Stanley analysts including Charlie Chan wrote in a note this week. 

If they’re right, it might not be long before TSMC cracks into that top 10 market cap club.

©2024 Bloomberg L.P.