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Taiwan Semi: A Bright Future of Growth Ahead

As the Nasdaq-100 (NDX) fell almost 6% since the start of the month, shares of Taiwan Semi (TSM) were dragged down about 3%.

Investors trimmed their positions in technology stocks and other underperforming sectors to add to cyclical energy companies, which benefited from the strong rise in crude oil and natural gas commodity spot prices.

Taiwan Semi has solid fundamentals, such as its strong balance sheet as well as a healthy operating profitability. Moreover, the broader semiconductor industry offers unprecedented growth prospects. Thus, I am bullish on this stock.

Taiwan Semi is the world’s largest semiconductor foundry in regard to its output, and fundamentally contributes to innovation in the global semiconductor industry.

Taiwan Semi has 290 different process technologies, many based on 5-nanometer production capabilities, the most advanced in the world. The company manufactures more than 12,000 integrated circuit and semiconductor products for 535 customers in Asia, Europe, the U.S. and Canada.

Q4 Earnings

Supported by strong demand for Taiwan Semiconductor’s cutting-edge technology, revenue for the fourth quarter of 2021 was $15.74 billion, up more than 24% year-on-year. Also, GAAP earnings of $1.15 (per share) were up from $0.97 in the year-ago quarter.

While revenue missed the median consensus estimates by $30 million, GAAP earnings per share exceeded the median consensus estimate by $0.04.
For the quarter, gross margin was 52.7% (down 130 basis points year-over-year), operating margin stood at 41.7% (down 180 basis points year-over-year), while the net income margin hovered at 38% (down approximately 160 basis points year-over-year).

Looking Ahead

For the first quarter of 2022, the semiconductor company is forecasting revenue of $16.6 billion to $17.2 billion and is expecting gross profit margin and operating profit margin of 54% and 43%, respectively.

An Industry Outlook: Short- and Long-Term Drivers

The semiconductor industry did not have an easy time last year due to the global shortage of its inputs. As a result of the same issue, the industry could face some uncertainty in the coming months of 2022, but in a lesser form as supply chains slowly rebalance across industries thanks to the continued improvement in the number of COVID-19 infections.

The ongoing unpredictable nature of the current pandemic may still cause Taiwan Semi and other semiconductor manufacturers to lose some ground along the way and potentially trade at lower market prices than they do now. However, given the bright outlook for the industry, Taiwan Semi could be a compelling play even at these prices.

In the longer term, the industry will be driven by the following digital transformations and robust demand for semiconductors in personal computers, smartphones, and tablets. Furthermore, the rollout of 5G technology in the telecom sector, the increasing adoption of clean technologies across many industries and the electrification of the automotive market towards new energy vehicles (NEVs) are already seeing ramped up need for advanced chips.

In addition, fueled by the development of artificial intelligence and IoT applications, Taiwan Semi is among the world’s best-positioned microchip suppliers to capitalize on the expected new wave of innovation in the semiconductor industry.

Dividend

On April 14, 2022, Taiwan Semi will pay a quarterly dividend of $0.495 per share, which translates to a dividend yield of 1.55% as of this writing.

Wall Street’s Take

In the past three months, five Wall Street analysts have issued a 12-month price target for TSM. The company has a Moderate Buy analyst rating consensus, based on three Buys and two Hold ratings. The average Taiwan Semi price target is $142, implying a 19.02% upside potential.

Conclusion

Elevated inflation, mainly due to record-high energy prices, coupled with additional near-term headwinds from ongoing, albeit less severe, supply chain issues could see the stock price extend last month’s downtrend. Despite this, the industry has several demand-side catalysts to capitalize on, and if it’s not Taiwan Semi, a leader, who else can? The stock is poised for strong growth once this period of uncertainty wanes away.

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