Taiwan Semiconductor Manufacturing Company Limited (NYSE: TSM)
TSMC produces the world's smallest, densest, and most power-efficient chips for fabless chipmakers like Apple, Advanced Micro Devices, and Qualcomm. The company has a 90% market share of the world's most advanced chips, it has a much, much larger library of recipes or process knowledge or process technology for manufacturing these chips. With the recent successes and Warren Buffett’s new stake in the company, Taiwan Semiconductor Manufacturing Company has seen an increase in mentions by 99% over the last day, prompting investors to wonder what makes the company gain so much hype. Currently, shares of Taiwan Semi trade at $82.52 each.
Positive Hype
Given the company's strong strategic position, technology, growth, and profitability, there are lots of reasons it has generated such positive hype. Here are some of them.
Taiwan Semi commanded a 53% global market share in the semiconductor market in the first quarter of 2022, according to Statista.
In its second quarter, revenue surged 43.5% year over year, while net income and earnings per share soared 76%.
While the industry as a whole was taking a step back, TSMC reported third-quarter sales that soared 48% year over year and 15% compared to the previous quarter.
TSMC is the exclusive provider of silicon processing chips used by Apple in its products. Given the belief that Apple's innovation will drive sales and profits higher, it only makes sense that one of its key chip suppliers will benefit, too.
At recent prices, TSMC's American depository receipts, which are essentially shares of a foreign business that trade on U.S. exchanges offer a 2.3% dividend yield. Investors will be glad to know the company hasn't reduced its payout in its own currency since implementing an all-cash dividend program in 2009.
As recently reported by news outlet Nikkei Asia, Taiwan Semi says it's working on making its supply chain more resilient, partly by working with suppliers to create local production of neon in Taiwan, to be up and running within the next three to five years. Interestingly, while outlining its spending on future projects, Air Products has a line item for a $900 million project for a semiconductor manufacturer in Taiwan which is a beneficial potential collaboration.
Its shares trade at 14 times the expected earnings. The stock's price-to-earnings-to-growth (PEG) ratio is only 0.87, making TSM seem quite the bargain.
Semiconductor industry leaders believe that global chip sales are headed toward $1 trillion a year by 2030 which is up from about $600 billion expected in 2022, representing an annual compound growth rate of 6.6%.
Negative Hype
Although Taiwan Semi has generated a lot of positive hype, there is still a reason to be cautious before taking a position in the company. Here are some of them.
The stock is down 33% year to date as investors worry about an oversupply of semiconductors in the market. Right now, the semiconductor industry as a whole is taking a step back amid relatively soft demand for electronic devices.
The company is cyclical and based in Taiwan, which implies that it does carry risks of invasion from its neighbour China.
Conclusion
For now, TSMC's main concern is working through the inventory oversupply in consumer electronics for the next few quarters. However, the company is also focused on continuously improving its manufacturing technology to maintain its lead and capitalize on growth trends in the semiconductor industry, while also expanding its manufacturing capacities to the US. Further expansion outside of Asia is also on the table. Given the recent drop in price and the strong potential for growth in the near future, Taiwan Semi should be on your radar.
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