TSM Stock Is a Play on Semiconductor Industry’s Secular Growth Trends

Chip foundry Taiwan Semiconductor Manufacturing Company’s (NYSE:TSM) stock has held up fairly well in 2021 but experienced a pulled back along with its tech peers in 2022. TSMC is the ninth highest valued company in the world. It boasts a market capitalization of $534.38 billion.

image of TSM semiconductor office building
Source: Sundry Photography / Shutterstock.com

What makes TSM a must-have stock in your portfolio? The chips churned out by the contract manufacturer are ubiquitous. They can found powering most of the consumer electronics devices sold world over. TSMC supplies life blood to all those fabless semiconductor companies that are heavily reliant on it.

Founded in 1987, the company manufactures chips that cater to diverse applications and products. The diversification of the client base renders the company immune to softness that is specific to a particular sector/industry. It has also been in the forefront innovation and cutting-edge technology. In 2020, the Hsinchu, Taiwan-headquartered company had 281 distinct process technologies and manufactured 11,617 products for 510 customers.

TSMC Is a Cut Above the Rest

TSMC is already working on the next-gen chip manufacturing technology — the 3 nanometer (nm) process node tech, dubbed N3, ahead of many others in the industry. The technology is able to offer a nearly 70% logic density gain, a 15% speed improvement at the same power, and a 30% power reduction at the same speed compared to current 5 nm technology.

Volume production of the N3 is expected to commence in the second half of 2022.

An improved iteration of N3, named N3e, which is currently being tested, has shown an improvement in yield, a Morgan Stanley (NYSE:MS) note shared on Twitter (NYSE:TWTR) revealed. Analysts from the firm expect the company to freeze the N3e process flow by the end of March and begin volume production in the second quarter. This would put it around an entire quarter ahead of schedule.

To put things in perspective, Samsung is the only other chipmaker that has taken to 5 nm technology. Chip giant Intel (NASDAQ:INTC), which has opted to remain an integrated device manufacturer (IDM), hasn’t still made much headway in its quest to wrest back process technology leadership after a series of product missteps.

TSMC commanded a 53.1% share of foundry market in the third quarter of 2021. Samsung was a distant second with a 17.1% share.

TSM Stock Ticks All Boxes With Its Q4

TSMC’s fourth-quarter revenues climbed 21.2% year-over-year and 5.7% quarter-over-quarter to $15.74 billion.

Revenue Contribution by Different Verticals in Q4

TSM Revenue Segments In Q4
Source: Chart by Shanthi Rexaline

The 7 nm and 5 nm process technologies, collectively called advanced technologies by TSMC, contributed about 31% and 19% of wafer revenues, respectively. Fourth-quarter gross margin expanded 1.4 percent points (ppt) sequentially to 52.7% on cost improvement and operating margin grew 0.5 ppt to 41.7%.

The company ended the fourth quarter with cash and marketable securities of $42.95 billion.

Robust Chip Industry Outlook Underpins Demand

TSMC guided to first-quarter revenues of $16.6 billion – $17.2 billion. The midpoint of the range suggests a 7.4% quarter-over-quarter increase.

Wendell Huang, TSMC’s Vice President and Chief Financial Officer said on the earnings call:

We expect our business in the first quarter to be supported by HPC-related demand, continued recovery in the automotive segment and a milder smartphone seasonality than in recent years.

Citing structural increase in chip demand and the industry trends of 5G and high performance computing (HPC) applications, TSMC hiked its 2022 capital expenditures (capex) from 34% to 47%. From about to $40 billion to $44 billion. The company expects to use 70% – 80% of the capex on advanced process technologies, including 2 nm, 3 nm, and 5 nm technologies.

The global chip industry is well positioned on a trajectory of “robust growth” in 2022, according to management consulting and accounting firm Deloitte. The firm expects the industry to grow at a robust clip of 10% in 2022 to $600 billion.

Deloitte sees strong secular growth trend in the coming years:

Over the long run, semiconductor revenues are likely to oscillate around a trend line. Still, that trend line looks steeper than ever before as we enter a period of robust secular growth.

Bottom Line on TSM Stock

Given TSMC’s technological leadership, strong competitive positioning, flawless execution, operational efficiency and the positive industry outlook, the future holds promise for the Taiwanese company.

The foundry is shooting for long-term revenue compounded annual revenue growth of 15% – 20% over the next several years. TSMC is also confident of achieving long-term gross margin of 53% or higher.

TSMC’s CEO C.C. Wei said on the earnings call that the company expects to outgrow its fabless and IDM peers in 2022.

When weighed against the prospects, TSM stock looks reasonably valued. It is trading at 9.82 times its trailing-twelve-month (TTM) sales. The forward price to earnings (P/E) for the stock is 20.92, roughly in line with the industry’s 18.5. In comparison AMD (NASDAQ:AMD) is trading at a TTM price to sales (P/S) ratio of 9.05 and forward P/E of 29.85.

TSM stock, therefore, could be the best fit for investors who are looking to load their portfolio with a high-growth tech stock that is fairly insulated against industry-wide and economic shocks.

On the date of publication, Shanthi Rexaline 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.

Shanthi is a contributor to InvestorPlace.com as well as a staff writer with Benzinga. Equipped with a Bachelor’s degree in Agriculture and an MBA with specialization in finance and marketing, she has about two decades of experience in financial reporting and analysis, and specializes in the biopharma and EV sectors.

Article printed from InvestorPlace Media, https://investorplace.com/2022/03/tsm-stock-is-a-play-on-semiconductor-industrys-secular-growth-trends/.

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