It’s been a rough few months for shares of Taiwan Semiconductor Manufacturing Company (NYSE: TSM). The world’s largest specialized foundry in the semiconductor industry has lost more than half of its value over the past year as the ongoing macroeconomic turmoil and political risk attached to Taiwan’s relationship with China have spooked investors. Yet, its critical role in the world’s economy reminds us that TSM’s investment case remains alluring, with its most recent performance metrics surprising the market quite positively. Following the stock’s steep decline, I believe TSM shares are quite attractively priced as well. Accordingly, I am bullish on the stock.
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TSM Shares Have Plummeted, but Its Qualities Remain Prominent
TSM shares have been under heavy pressure over the past year as the company is facing risks on multiple fronts.
Firstly, as you know, the semiconductor industry is wildly cyclical. With the ongoing rise in rates and concerns over an economic slowdown likely to lead to declining consumer spending, it’s only reasonable to expect that TSM’s performance could take a hit in the coming quarters.
Simultaneously, China’s escalating threats toward Taiwan’s sovereignty threaten the company’s operations amid a potential war conflict.
That said, TSM’s qualities remain robust. The company’s proprietary integrated circuit structures are critical for multiple industries to operate efficiently. This is evident by the fact that last year, TSM produced 26% of the world’s total semiconductor output value (excluding memory).
The company’s moat is huge as well, as its circuit structures are developed with each customer’s demand in mind, which means that TSM’s semiconductors have become essential for multiple key corporations.
For instance, TSM is the sole supplier of Apple’s silicon processors for iPhones and Mac PCs. It is also the prime manufacturing partner of other fundamental companies, including AMD (NASDAQ: AMD), Broadcom (NASDAQ: AVGO), and Qualcomm (NASDAQ: QCOM). These traits make it a truly unique player in the industry whose qualities offer a relatively greater margin of safety versus that of its peers when the overall industry comes under pressure.
TSM’s Q3 Results Were Great
Despite the ongoing global crises endangering the company, TSM’s latest results demonstrated the critical nature of its semiconductors, which continued to attract growing demand.
Specifically, for its Q3-2022 results, the company posted revenues of $20.2 billion, indicating an increase of 35.9% year-over-year and an increase of 11.4% from Q2 2022. In fact, it even implies an acceleration in revenue growth from Q2’s sequential revenue growth of 3.4%.
Margins were also sustained at jaw-dropping levels and even expanded further, with TSM remaining incredibly profitable. Specifically, its gross margin came in at 60.4%, operating margin at 50.6%, and net income margin at 45.8%. These figures compare to 59.1%, 49.1%, and 44.4% compared to the previous quarter, or to 51.3%, 41.2%, and 37.7%, compared to last year, respectively.
TSM’s margins expanded due to operating expenses accounting for 9.8% of net revenue compared to 10% in the previous quarter. The 1.5% sequential increase in operating margin was also mainly due to better operating leverage (i.e., basically improving economies of scale).
TSM maintained very strong demand momentum, primarily powered by strong demand for its industry-leading 5nm technologies. Moving into Q4 2022, the company expects its results to be about flat as the end market demand softens and customers’ current inventory adjustment is counteracted by the continued ramp-up for TSM’s 5nm technologies.
Are Shares of TSM Cheap?
With shares of TSM plunging against growing revenues and profits, the stock has now become increasingly cheap, in my view.
The company is expected to post Fiscal 2022 revenues of $70.8 billion and earnings per share of roughly $6.42. Accordingly, TSM shares are trading at a forward P/E ratio of around 10x. This implies a substantial discount based on TSM’s current growth rates and margin expansion prospects, even if growth was to materially slow down in the future.
Further, following the stock’s violent decline, TSM shares now yield a noteworthy 3%. It’s not a remarkable yield, but certainly, one that complements TSM’s already compelling investment case. It should also provide a modest margin of safety against a further decline in the stock price.
Is TSM Stock a Buy or Sell, According to Analysts?
Wall Street analysts seem to be on the same page when it comes to Taiwan Semiconductor Manufacturing’s undervaluation. The stock has attracted a Strong Buy consensus rating based on four Buys and one Hold assigned in the past three months. At $93.00, the average Taiwan Semiconductor Manufacturing stock prediction implies a massive 52.1% upside potential.
Takeaway: A Critical, Undervalued Business
In my view, investors are right to be wary of TSM’s operations during such a highly-uncertain environment, both macroeconomically and geopolitically speaking.
However, the massive decline in the stock price over the past year has likely been overdone, setting quite a favorable risk/reward format. Unless an actual war spurs in Taiwan, investors could be looking at significant upside potential from a well-deserved valuation expansion alone.
