Headquartered in Hsinchu City, Taiwan, Taiwan Semiconductor Manufacturing Company Limited (TSM), with a market capitalization of $394.31 billion, provides integrated circuit manufacturing services globally. This involves manufacturing, packaging, testing, and selling integrated circuits and other semiconductor devices.
On December 6, TSM updated that in addition to its first fab in Arizona, which is scheduled to begin production in 2024, it has also started the construction of a second fab, scheduled to begin production in 2026.
The overall investment for these two fabs will be approximately US$40 billion. When complete, TSMC Arizona’s two fabs will manufacture over 600,000 wafers annually, with an estimated end-product value of more than US$40 billion.
The super-advanced semiconductor chips that TSM produces are difficult to fabricate due to their high development costs. Hence, this presents a significant barrier to entry into the competition.
On November 15, it was revealed that Warren Buffett’s Berkshire Hathaway (BRK.A, BRK.B) spent $4.1 billion to acquire a stake in the world's largest contract chipmaker during the third quarter. According to SEC filings, the fabled conglomerate bought just over 60 million of TSMC's New York-listed American Depositary Shares at an average price of around $68.56.
Moreover, on October 27, TSM announced the Open Innovation Platform (OIP) 3DFabric Alliance at the 2022 Open Innovation Platform Ecosystem Forum. TSM’s first-of-its-kind alliance in the semiconductor industry will help customers achieve speedy silicon and system-level innovations and enable next-generation HPC and mobile applications using TSM’s 3DFabric technologies.
The stock has dipped 8.2% over the past month to close its last trading session at $75.28. However, it is still trading above its 50-day moving average of $72.58.
Let’s closely examine the factors that make it worthy of investment.
Robust Financials
For the third quarter of fiscal 2022 ended September 30, TSM’s net sales increased 47.9% year-over-year to NT$613.14 billion ($19 billion), while its income from operations increased 81.5% year-over-year to NT$310.32 billion ($9.62 billion).
During the same period, TSM’s net income increased 79.7% to NT$280.87 billion ($8.70 billion) or NT$10.83 per share, up 79.8% year-over-year.
Excellent Asset Utilization by Management
TSM’s trailing 12-month gross profit margin of 57.30% is higher than the industry average of 49.64%. Also, the company’s trailing-12-month EBITDA margin and net income margin of 68.04% and 42.51% exceed the industry averages of 11.74% and 3.25%, respectively.
Additionally, TSM’s trailing-12-month ROCE, ROTC, and ROTA of 36.67%, 19.33%, and 19.01% are significantly higher than the respective industry averages of 5.00%, 3.24%, and 1.52%.
Attractive Valuation
In terms of its forward P/E, TSM is trading at 11.65x, 35.9% lower than the industry average of 18.17x. The stock’s forward EV/EBITDA multiple of 7.26 is 39.8% lower than the industry average of 12.06.
Moreover, TSM’s forward Price/Cash Flow multiple of 7.52 is 56.2% lower than the industry average of 17.16.
Favorable Analyst Estimates
Analysts expect TSM’s revenue for the fiscal year 2022 to increase 30% year-over-year to $74.63 billion, while its EPS is expected to increase 56.8% year-over-year to $6.46. It has also impressed by surpassing the consensus EPS estimates in each of the trailing four quarters.
POWR Ratings Reflect Promising Prospects
TSM’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. TSM has an A grade for Quality, in sync with its impressive profitability metrics.
The stock also has an A grade for Sentiment and a B for Growth, underscored by its robust financials and favorable analyst estimates.
TSM is ranked #9 of 92 stocks in the B-rated Semiconductor & Wireless Chip industry.
Click here for additional POWR Ratings for TSM’s Value, Momentum, and Stability.
Bottom Line
TSM is a global leader in the chip fabrication business, with significant barriers to entry. It is well-positioned to enjoy ever-increasing demand due to the extensive usage of its products in electronics, critical infrastructure, electric vehicles, and other industries. This gives the company immense pricing power.
Moreover, by expanding its operations in the U.S. mainland, TSM has geographically diversified itself enough to neutralize the geopolitical risk of Chinese aggression in Taiwan, which was suppressing its intrinsic value.
Given these factors, TSM could be an excellent investment for long-term gains.
How Does Taiwan Semiconductor Manufacturing Company Limited (TSM) Stack up Against Its Peers?
While TSM has an overall POWR Rating of B, which equates to a Buy, investors could also consider looking at its A-rated industry peers: STMicroelectronics N.V. (STM), Renesas Electronics Corporation (RNECF), and United Microelectronics Corporation (UMC).
TSM shares were trading at $74.74 per share on Friday afternoon, down $0.54 (-0.72%). Year-to-date, TSM has declined -36.82%, versus a -18.24% rise in the benchmark S&P 500 index during the same period.
About the Author: Santanu Roy
Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.
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