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 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 highlighted in its Q3 reports, Taiwan Semiconductor Manufacturing Company has seen an increase in mentions by 86% over the last day, prompting investors to wonder what makes the company gain so much hype. Currently, shares of Taiwan Semi trade at $65.75 each.
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.
Its revenue rose 36% year over year to $20.23 billion, beating analysts' estimates by $1.14 billion, as its earnings grew 66% to $1.79 per ADR and topped the consensus forecast by $0.11.
After the third-quarter 2022 earnings update, TSMC has hauled in $71.7 billion in revenue over the last reported 12 months. It has averaged 17.5% annual revenue growth since it went public in 1994.
Net profit margins were also at a sky-high 46% in Q3 2022. Earnings jumped nearly 80% in local currency terms.
TSMC's high gross margins are supported by its unmatched pricing power, since it's the only contract chipmaker that can mass produce the world's smallest and densest chips, which means increased demand would lead to major gains.
CFO Wendell Huang pointed to strong demand for Taiwan Semi's small 5-nanometer technology as the driving factor in its quarterly results, additionally, no competitor is able to produce at this scale.
The company's revenue guidance for the fourth quarter now underway was better than expected, and analysts are still projecting the company's revenue to grow by 28% this year despite the softening economy.
The company is now trading at just 13.2 times earnings and has grown revenue and net income by 91.5% and 140.4% respectively in the last three years.
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%.
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 market is concerned that it's located in Taiwan and that China claims to control Taiwan and there's been talk and rhetoric recently that China maybe possibly could invade Taiwan.
There is also the U.S. ban on sales of high-end data centres and AI chips to China, which the government of Taiwan says it will comply with.
Competitive risk is there (intel increased spending to catch up), technological obsolescence to an extent is there, and then semiconductors, the industry has historically been cyclical.
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. 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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