tiprankstipranks
Stock Analysis & Ideas

Taiwan Semiconductor: Accelerating Growth to Power Returns

Taiwan Semiconductor Manufacturing Company (TSM) is currently the largest specialized foundry in the semiconductor industry across the globe. The company designs semiconductors based on proprietary integrated circuit structures demanded by its customers.

TSM produces around 25% of all semiconductor (excluding memory) output value globally, which demonstrates the potency of its industry-leading position.

TSM shares have lagged over the past year despite the company’s continuous advancements. In my opinion, the company is well positioned to keep benefiting as the ever-growing global demand for semiconductors shows no signs of slowing down.

The company’s latest results once again illustrated TSM’s resilience despite ongoing supply chain challenges. Consequently, I remain bullish on the stock despite its somewhat pricy valuation.

Recent Results

TSM’s Q4 2021 results came in strong, with revenues at $15.74 billion, implying an increase of 24.1% year-over-year and an increase of 5.8% from Q3 2021.

Margins also remained quite juicy. Specifically, gross margin came in at 52.7%, operating margin at 41.7%, and net profit margin at 37.9%. These figures compare to 51.3%, 41.2%, and 37.7%, respectively, from Q3 2021.

TSM’s maintained very strong momentum primarily powered by record demand across all its four growth platforms. These comprise smartphones, HPC, IoT, and Automotive-related applications.

In a subsequent-to-the-quarter news release, TSM also announced that its January revenues grew 35.8% year-over-year or 10.8% quarter-over-quarter, suggesting that TSM’s impressive growth is not just sustained but even accelerating.

Valuation

TSM’s market-leading position and the ongoing record levels of demand for semiconductors should result in robust growth for the company moving forward, as indicated by its most recent quarterly results. That said, TSM investors should be wary of the stock’s valuation, as it remains a bit pricy.

Management expects FY 2022 revenues to land between $16.6 billion and $17.2 billion, and the company to achieve an operating profit margin between 42% and 44%.

Hence, I estimate that FY 2022 EPS should land close to $5.50. That’s a slightly prudent estimate, but better to be conservative. Accordingly, the stock is trading at a forward P/E of 21.1.

Generally speaking, this is is rather rich multiple when it comes to the semiconductor industry. However, based on TSM’s ongoing growth pace and sky-high margins, I consider it quite fair.

On the one hand, demand for semiconductors can be cyclical over long periods of time, so a stock like TSM should be trading at a humbler multiple. On the other, I can’t overlook TSM’s moat and continuous growth, which do deserve a premium.

Wall Street’s Take

Turning to Wall Street, Taiwan Semiconductor Manufacturing has a Moderate Buy consensus rating, based on three Buys and two Holds assigned in the past three months. At $142, the average Taiwan Semiconductor Manufacturing price target implies 22.5% upside potential.

Conclusion 

TSM’s qualities, including virtually no competition on its niche operations, consistent growth, and rich margins, are like no other. The ongoing favorable market environment should be a great tailwind for the stock. Considering its excellent Q4 results, even better January sales, and encouraging guidance for FY 2022, I remain bullish on the stock.

Download the TipRanks mobile app now

​To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Read full Disclaimer & Disclosure

Tired of arriving late to the Big Returns Party?​
Most investors don’t have major gainers like TSLA or NVDA on their radar from the start.
The profusion of opinions on social media and financial blogs makes it impossible to distinguish between real growth potential and pure hype.
​​For the past decade, we have developed and perfected technology designed to help private investors, just like you, find the best opportunities, with the greatest upside potential, in any financial climate.​
Learn More