Stock Analysis & Ideas

Up 26% YTD, Taiwan Semiconductor Stock (NYSE:TSM) Could Head Even Higher

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Semiconductor stocks performed poorly in 2022, but Taiwan Semiconductor has enjoyed a strong start to 2023 as investor sentiment towards the semiconductor industry seems to be improving. Over the long term, experts expect semiconductors to grow to a $1 trillion industry globally, which is just one of the reasons why shares of Taiwan Semiconductor could still have considerable upside ahead.

Taiwan Semiconductor (NYSE:TSM) stock has roared out to a 26% gain so far in 2023, just a few weeks into the new year, and I believe that shares could continue to head a lot higher. I’m bullish on Taiwan Semiconductor even after this strong year-to-date rally, thanks to the stock’s attractive valuation, the company’s crucial role in the global economy, and the fact that sentiment towards the semiconductor sector seems to be improving rapidly.

TSM’s Valuation Continues to Look Compelling

Even after this strong start to 2023, not to mention a scorching 57% rally off of its 52-week low, shares of Taiwan Semiconductor still look cheap. Shares trade at just ~14 times earnings, which represents a discount to the broader market. For comparison, the average multiple for the S&P 500 (SPX) is currently about 16 times earnings. Shares are a bit more expensive on a forward basis, trading at 16 times forward earnings, but this is still a discount to the S&P 500’s forward price-to-earnings multiple of 20. Looking further out to 2024, the forward P/E ratio comes down to 13.3 times.

A PEG ratio of 0.66 also indicates that Taiwan Semiconductor is a buy. The PEG ratio, or price/earnings to growth ratio, is a metric that takes earnings growth into account when valuing a stock, dividing a stock’s price-to-earnings multiple by its earnings growth rate. Investors who use this metric typically view a stock with a PEG ratio of under 1.0 as undervalued, so Taiwan Semiconductor’s PEG ratio of just 0.65 makes it look like a bargain in comparison to its earnings growth.

Furthermore, while the stock has bounced back from its 52-week low in a big way,  it wasn’t too long ago that shares of Taiwan Semiconductor were trading at much higher levels — shares are still down over 25% from their 52-week high of $128.66. Zoom a little further out, and the stock traded above $140 a share at the start of 2022. 

This all seems too cheap for a company like Taiwan Semiconductor, which not only serves as a linchpin to the global economy but operates in a business that comes with significant barriers to entry, which I will cover below.

A Crucial Piece of the Global Economy

Taiwan Semiconductor is the world’s largest contract chipmaker. The company makes the world’s smallest and most advanced chips, and in recent years, it has pulled ahead of competitors like Intel (NASDAQ:INTC).

It takes significant manufacturing expertise and intellectual capital to manufacture the advanced chips that Taiwan Semiconductor makes, and it would be very difficult for a new competitor to come in and start competing with Taiwan Semiconductor. As such, the company is very profitable, with a gross margin of almost 60% and an operating margin approaching 40%. 

Taiwan Semiconductor counts Apple (NASDAQ:AAPL), along with many of the world’s leading semiconductor companies like Nvidia (NASDAQ:NVDA) and Advanced Micro Devices (NASDAQ:AMD), as its customers. Taiwan Semiconductor’s chips are crucial to a wide array of end markets, from mobile devices and industrial machinery to automobiles and fighter jets.

Because of the crucial role these chips play in these products, some pundits have called Taiwan Semiconductor “the world’s most important company that you’ve probably never heard of.” Furthermore, Taiwan Semiconductor serves a variety of end markets that look poised for long-term growth, such as high-performance computing and artificial intelligence.

Sentiment Can Change Quickly

Semiconductor stocks, in general, had a bad year in 2022, as concerns about an oversupply of semiconductors and where the industry was in its cycle caused shares of these companies to sell off. However, the flip side of being a cyclical industry is that when the cycle changes, momentum for the stocks can return quickly as sentiment improves, which seems to be happening now.

Investors can be fickle — for many years, energy companies were viewed as poor options by many investors, but in 2022, energy was the S&P 500’s best-performing sector by far. Likewise, semiconductor stocks performed poorly in 2022, but the sector already seems to be back in favor so far in 2023, and that’s why it’s best for investors to look beyond the short-term price fluctuations and focus on the long-term potential of companies like Taiwan Semiconductor. 

While experts expect the semiconductor market to contract slightly in 2023, over the long term, semiconductors continue to look like a secular growth story, and I like the idea of investing in a manufacturer that serves almost all of the top players in the space. Renowned consultant McKinsey forecasts the semiconductor market to reach $1 trillion globally by 2030 (up from about $600 billion today).

Is TSM Stock a Buy, According to Analysts?

Sell-side analysts agree with this thesis that Taiwan Semiconductor looks like a Strong Buy. The stock has five Buy ratings and one Sell rating from the analysts that cover it. The average TSM stock price target of $104.33 implies upside potential of about 12.5%. Even the lowest analyst price target of $98 is still above Taiwan Semiconductor’s current price of $92.73.

Takeaway: TSM Stock Continues to Look Attractive

Due to Taiwan Semiconductor’s cheap valuation, I expect the stock price to continue to climb as momentum builds and as enthusiasm for the semiconductor industry returns to the market. Given the recent run, there will inevitably be some pullbacks in the near future, which investors should consider buying into.

Taiwan Semiconductor is an industry leader in a market that should continue to grow well into the future. The company features strong profitability and is trading at a below-average multiple, making the stock attractive.


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