Taiwan Semiconductor Manufacturing Company (TSM) is presently the largest specialized foundry in the global semiconductor industry. The company manufactures semiconductors based on proprietary integrated circuit designs required by its customers.
The company produced 24% of all semiconductor (excluding memory) output value globally in 2020 compared to 21% in 2019, which illustrated TSM’s strengthening its industry-leading position over time.
The stock has lagged over the past year despite TSM’s ongoing advancements. In my view, the company’s financials are set to keep evolving as the global demand for semiconductors seems to be growing with no signs of slowing down. Hence, investors are likely to encounter appealing opportunities in TSM’s dips.
I am bullish on the stock. However, note that TSM shares have historically traded with a premium price tag attached.
Latest Results
TSM’s Q3-2021 results came in rather strong, with revenues at $14.88 billion, representing an increase of 22.6% year-over-year and an increase of 12% from the previous quarter. Margins were also stellar during the period. Specifically, gross margin was 51.3%, operating margin was 41.2%, and net profit margin was 37.7%.
The company’s strong performance was largely driven by strong demand across all its four growth platforms, including smartphones, HPC, IoT, and Automotive-related applications.
In a post-quarter news release, the company also announced that its October revenues grew 12.8% year-over-year. Last month, the company also revealed that its November revenues grew 19% year-over-year and 10% month-over-month, which is quite impressive and shows that TSM’s impressive growth levels remain untouched.
The Valuation
While I remain optimistic that TSM’s market-leading position will lead to growing financials driven by a growing market, TSM investors should be aware of the stock’s valuation, which certainly does not imply a discount.
TSM shares are currently trading at a forward P/E of 31.4 based on analysts’ expectations of 2021 EPS of $4.08. While this is not a sky-high multiple, generally speaking, it is rather rich when it comes to the semiconductor industry.
Demand for semiconductors can be cyclical over time, so it’s not infrequent to see stocks in the space trading with a P/E in the single digits. Still, TSM’s market-leading position and moat do deserve a premium, while due to the sky-high demand for semiconductors, its cash flows are unlikely to take a big hit anytime soon.
Further, assuming profitability growth maintains its present pace over the next few years, investors probably assess the stock fairly.
Finally, increasing capital returns should also help the stock retain a premium multiple. TSM has never cut its growing dividend since initiating it back in 2004.
The stock’s yield of around 1.5% may not be enormous, but the dividend is growing fast, and future increases are likely to continue at a pace north of 10% in the medium term backed by a comfortable payout ratio, which stands below 40%.
Wall Street’s Take
Turning to Wall Street, Taiwan Semiconductor Manufacturing has a Hold consensus rating, based on two Holds assigned in the past three months. At $120, the average Taiwan Semiconductor Manufacturing price target implies 6.2% downside potential.
Conclusion
In my view, TSM is a quality business operating in a favorable market environment. Hence, the stock is likely to keep trading at a premium, which along with TSM’s ongoing growth, is likely to result in decent upside prospects going forward.
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Disclosure: On the date of publication, Nikolaos Sismanis had a beneficial long position in the shares of Taiwan Semiconductor Manufacturing Company Limited (TSM) through stock ownership.
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