It’s easy to see why billionaire investor Warren Buffet is interested in shares of Taiwan Semiconductor Manufacturing (NYSE:TSM) at current prices. His firm revealed a massive $4.1 billion stake in TSM, sending investors into a state of Euphoria last month. Buffet’s nod of approval provides a great sense of reassurance to the bulls who believe in TSM’s long-term positioning. Hence, it remains an excellent play at current levels for those willing to stomach the near-term volatility.
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TSM is truly a powerhouse in the chipmaking sphere. As the world’s largest semiconductor foundry, it’s been producing some of the most cutting-edge integrated circuits for its clients, such as Intel, AMD, and Nvidia, to name a few. TSM is a clear leader in global foundry revenues and controls 84% of the sub-10 nanometer chip market. The pandemic disrupted the semiconductor market, but TSM has proven its resiliency.
Moreover, it’s making a bold move by constructing a $12 billion 5-nanometer chip fabrication plant in Arizona on the back of robust demand. Demand is so strong that it already plans to construct a second plant in the region and another in Japan. Hence, it’s poised to redefine innovation on a grand scale.
TSM Stock Has a Solid Operating Profile
TSM’s financial performance has been incredible over the past several years. It boasts impressive margins and an amazing balance sheet, with twice as much cash as debt. Perhaps the only reason its shares had performed so poorly was the uncertainty with China. Apart from that, it’s tough to hold anything against TSM, as it continues to turn heads with its performances even in the current economic downturn.
Over the past five years, the firm has grown its revenues by a CAGR (compound annual growth rate) of 16.63%. More importantly, its EBITDA has grown at a CAGR of 17.52% in the same period. Also, its levered free cash flow has risen at a similar pace which is a testament to the quality of its business.
In its recently released third-quarter earnings report, its revenues have soared 36% to $20.2 billion. Moreover, its earnings per share jumped 58.2% to $1.70. While supply-chain bottlenecks constrained most industries, the semiconductor giant hasn’t been impacted by the sector downturn as long-term demand remains firmly in place.
Warren Buffett is a Believer in TSM Stock
Warren Buffett remains a juggernaut in the investing world, and his actions naturally carry a lot of weight. His recent moves are indicative of how attitudes about technology stocks have evolved. His largest holding is now Apple, a tech company that most consider to be the best in its class. Similarly, his massive investment in TSM shows that he believes the firm is the best in class in its sector.
This component manufacturer is an integral part of the entire technology industry, and some of the biggest names in the space are its customers. This significantly bullish endorsement by one of the greatest investors has given much optimism to hopeful TSM shareholders.
The semiconductor industry’s health appears to be improving substantially, and TSM’s position as a leader in the space positions it for long-term success. Its stock is trading at a forward price-to-earnings ratio of 12.75x, a 40.75% discount to its 5-year average.
The company enjoys a healthy demand for its leading-edge processes that far outpaces its current supply capacities, enabling them to obtain pricing power over its competitors and capitalize on its advantages.
Is TSM Stock a Buy?
Turning to Wall Street, TSM stock maintains a Strong Buy consensus rating. Out of 6 total analyst ratings, 6 Buys, zero Holds, and zero Sells were assigned over the past three months. The average TSM price target is $104, implying almost 29% upside potential. Analyst price targets range from a low of $98 per share to a high of $110 per share.
Conclusion: TSM Stock’s Cyclical Nature Can Offer Opportunities
Investing in the semiconductor industry can be frustrating for investors, but for those who understand the market’s cyclical nature, it can offer massive opportunities. TSM is the leading chip maker in the world; its current price is incredibly attractive for long-term investors. Those looking to invest in the sector should follow Buffet’s lead and load up on TSM stock. TSM will likely go through its cycles of growth and decline going forward; however, its long-term case remains firmly intact.
