Taiwan Semiconductor Manufacturing Company (TSM) is firing on all cylinders. Its top and bottom line advancements are sustaining robust growth momentum. With shares still trading at a discounted valuation following another excellent quarterly report, I remain bullish on the stock.
TSM is an Industry Leader in a Challenging Market Environment
Taiwan Semiconductor Manufacturing Company is presently the largest specialized foundry in the semiconductor space globally. The Taiwanese behemoth develops semiconductors based on proprietary integrated circuit structures as requested by its clients.
With its revolutionary technology allowing for endless possibilities, TSM’s market share in the semiconductor industry has been expanding continuously. Last year, the company produced 26% of the world’s semiconductor output value (excluding memory) compared to 24% in Fiscal Year 2020. Considering how massive the industry is, it shows TSM’s global dominance and massive moat.
Investors have been increasingly worried about the semiconductor industry outlook lately due to the ongoing macroeconomic unrest. After all, semiconductor sales are very cyclical and can be easily swayed by various macroeconomic factors, including inflation, GDP growth, and government and corporate spending.
With inflation at record levels, global growth possibly slowing down, and capital markets fearing a recession, it makes sense that investors are wary of TSM’s short to medium-term outlook.
Q2 Results: Robust Momentum Despite the Macro Uncertainties
Despite the multiple factors investors have been worried about materializing that could affect TSM’s performance, its most recent results showcased robust growth momentum.
For Q2 2022, the company reported revenues of $18.16 billion, implying an increase of 36.6% year-over-year, or 3.4% from the previous quarter. Revenue growth was largely driven by record demand across all four growth platforms.
These include smartphones, HPC, IoT, and Automotive-related applications. Impressively enough, Q1 2022’s revenue growth had landed at 36%, which means that the company is even undergoing an acceleration in sales.
Margins also remained incredibly juicy. Specifically, gross margin came in at 59.1%, operating margin at 49.1%, and net profit margin at 44.4%. These figures compare to 55.6%, 45.6%, and 41.3%, respectively, from Q1 2022, sustaining their expansion momentum.
These are just unbelievably high margins that almost no companies can exhibit consistently, let alone expand them. Margins’ growth becomes even more impressive considering TMS faces challenges from increasing inflationary costs from raw materials, utilities, and tools.
For Q3 2021, management expects revenues to be between $19.8 billion and US$20.6 billion, suggesting year-over-year growth of 35.7% at the midpoint. Considering that TSM has historically overperformed its outlook, its growth momentum should again see no slowdown in its upcoming results.
TSM is Undervalued at Current Levels
TSM has historically traded at a premium valuation due to its robust growth, juicy margins, and unparalleled moat in the industry. However, with its results on the rise and the stock declining, TSM’s valuation has been compressed substantially.
Based on the company’s 2022 first half results and management’s guidance, consensus EPS estimates for the full fiscal year stand at $6.30. Accordingly, the stock is trading at a forward P/E of 13.7. From a next-twelve-month EPS perspective, the stock’s forward P/E stands at 12.5, which is the lowest multiple the stock has traded at since 2016, and one of the lowest multiples the stock has traded at in general.
On the demand side, while TSM observed some softness in the consumer end market segment, data center and automotive-related demand remain robust. Thus, the company has reallocated its capacity to support these areas instead.
Along with its Q3 guidance, which points toward another exciting quarter ahead, I believe that shares are steeply undervalued. In any case, no companies are growing at 30%+, posting net margins north of 40%, and featuring the moat TSM does while trading at a P/E in the low teens.
Further, it’s worth noting that the enormous structural growth in the demand for computation, underpinned by the industry megatrend, continues to fill the greater appetite for performance and energy-efficient computing.
This trend will require using TSM’s leading-edge technologies, which further supports the lack of a slowdown in sales growth over the medium term. That, in turn, further highlights how undervalued shares are at their current levels.
Wall Street’s Take on TSM Stock
Turning to Wall Street, Taiwan Semiconductor Manufacturing has a Moderate Buy consensus rating based on one Buy and one Hold assigned in the past three months. At $88.00, the average Taiwan Semiconductor Manufacturing price target implies a 0.7% upside potential.
The Takeaway – Buying TSM at a Discount
The market appears to be paying no attention to TSM’s incredible growth and qualities. This is evident by the fact that only two Wall St. analysts cover the stock, despite TSM having a market cap of $428 billion. The reality that this is a non-U.S. company is to blame for this.
However, the market sleeping on TSM could play out as an advantage to prospective investors. This is due to shares remaining discounted despite the company disproving investors’ fears regarding a slowdown in its growth momentum. Consequently, I remain bullish on TSM.
