All signs indicate that the demand for semiconductors is likely to remain powerful for the foreseeable future. Meanwhile, Taiwan Semiconductor (NYSE:TSM), one of the largest names in the sector, recently reported very strong fourth-quarter results, and the valuation of TSM stock remains quite reasonable.
Also important, Taiwan Semiconductor is smartly responding to the incredible demand for chips by investing a tremendous amount of money in raising its chip production capacity. Finally, the demand for Taiwan Semiconductor’s advanced chips is likely to be very strong over the long term.
With that in mind, here’s a closer look at why TSM stock is a long-term buy.
TSM Stock: High Demand for Chips Likely to Remain
In recent weeks, I’ve heard and read the expression “chips are the new oil” several times. And that makes sense to me because semiconductors now power so many of our crucial possessions — from our cars to our smartphones and TVs.
With the Internet of Things revolution in motion and the connected car revolution just getting started, the demand for chips, if anything, is likely to greatly intensify going forward. The artificial intelligence boom is yet another pending revolution to cause the demand for chips to skyrocket in the longer term. After all, AI is powered by specialized chips.
But these catalysts aren’t the only thing driving TSM stock higher. Its impressive earnings results are also worth noting.
Taiwan Semiconductor Reported Strong Q4 Results
Unsurprisingly, given the intense demand for chips, Taiwan Semiconductor reported excellent Q4 results on Jan. 13.
The company reported Q4 earnings-per-share of $1.15, versus analysts’ average estimate of $1.11. Its top line jumped 24% year-over-year and was roughly in-line with the mean outlook. For Q1, Taiwan Semiconductor provided revenue guidance of $16.6 billion to $17.2 billion. At the midpoint of the range, that was above the average estimate of $16.7 billion.
According to Taiwan Semiconductor VP and CFO Wendell Huang “Our fourth quarter business was supported by strong demand for our industry-leading 5-nanometer technology.”
Advanced Chips and Intelligent Investments
Taiwan Semiconductors, which produced 24% of the world’s chips in 2020, makes some of the most advanced semiconductors available. Its products, for example, include the most advanced chips in Apple’s (NASDAQ:AAPL) iPhones. It also makes chips that enable AI in vehicles. According to CNBC, “[w]hen it comes to the most advanced chips used in the latest iPhones, supercomputers and automotive AI, TSMC is responsible for 92% of production.”
While the shortage of less advanced chips is reportedly more acute at this point, I’m more bullish on the outlook for top-notch chips over the long term. That’s because those semiconductors power the revolutionary devices that are likely to grow most rapidly going forward.
In conjunction with Taiwan Semiconductor’s Q4 results, its CEO, C.C. Wei, announced that its capital expenditures would be $40 billion to $44 billion in fiscal 2022. The company is allocating the large amount of funds in response to the global semiconductor shortage and to exploit the strong demand for its chips.
As I indicated earlier, I believe that the move makes a great deal of sense. Given the strong demand for Taiwan Semiconductor’s chips and the high likelihood that it will only accelerate in the months and years ahead, the company’s large capex, meant to boost its chip production, in all likelihood will prove to be extremely profitable over the long term.
The Bottom Line on TSM Stock
According to Marketwatch, the forward price-to-earnings ratio of Taiwan Semiconductors’ shares is only 28x. That’s not too far above the S&P 500’s mean P/E ratio.
Meanwhile, the company has many powerful, positive catalysts, both in the shorter term and the long term. As such, I think that the shares are worth buying at their current levels.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Larry Ramer has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, Ford, solar stocks, and Exxon. You can reach him on StockTwits at @larryramer.
