When Nasdaq’s correction intensified in 2022, markets sent semiconductor stocks lower. Taiwan Semiconductor (NYSE:TSM) is one of several firms in value territory. Companies like Advanced Micro Devices (NASDAQ:AMD) are increasing production with Taiwan Semi. Yet markets are panicking, unable to appreciate the upside potential in TSM stock.
Russia’s war with Ukraine is worrisome for Taiwan. China is watching Russia’s invasion closely. For decades, China wanted to claim Taiwan as its own. In turn, markets are watching China’s action. Taiwan semi stock is under-performing because of those fears.
TSM Stock Under Pressure
TSMC has a steady growth plan for the next decade. It is ahead of Intel (NASDAQ:INTC) in its manufacturing process. Intel is playing catch-up in the industry by spending billions building its capacity globally. This includes an Ohio factory that will cost $20 billion. TSMC’s growth ambitions are even greater.
It committed a capital expenditure plan of $100 billion over three years. For example, it has a $12 billion fabrication plant in Phoenix, Arizona, where it will produce 5-nanometer chips in 2024. TSMC will output 20,000 wafers monthly.
TSM views the European Union countries as a source for expanding chip production. In February, the company unveiled a plan calling for the European Commission to ease funding rules for semiconductor plants. The easing regulations in the region will benefit TSM. Amid a semiconductor shortage, the company will reshape its global supply chain.
The EU’s support for TSMC will help the company resolve the global chip shortage sooner. Furthermore, the company will geographically diversify its manufacturing facilities worldwide. This lowers the chances of another chip shortage in the future.
Opportunity
Markets sent TSM stock higher after the company posted strong fourth-quarter results. The rally all but faded in the following months. TSMC reported revenue of $15.74 billion, above its $15.4 – $15.7 guidance. It achieved gross margin of 52.7%. Return on equity of 31.3% is a strong 0.6 ppt sequential increase from Q3/2021.
TSMC benefited from 7nm accounting for 27% of revenue. Manufacturing in 5nm of 23% is a solid increase. This is consistent with the seasonally strong fourth quarter. In addition, healthy smartphone and high-performance computing demand contributed positively to growth. For example, smartphones accounted for 44% of Q4 revenue, followed by HPC at 37%.
Unlike start-up firms that lose money and sell stock to add cash, TSMC has plenty of cash and marketable securities. In Q4, this grew by 31.9% to NT$ 1,188 billion. Increased capital expenditures spread over several years will not weigh on the company’s balance sheet. Chip demand will outpace costs.
Fair Value
Investors should assume TSMC would grow its revenue by at least 15% annually. In a 5-year discounted cash flow revenue exit model, assume the following metrics:
| Metrics | Range | Conclusion |
| Discount Rate | 8.3% – 7.2% | 7.8% |
| Terminal Revenue Multiple | 5.9x – 6.6x | 6.3x |
| Fair Value | $127.95 – $144.99 | $136.31 |
The stock’s fair value of $136.31 gives investors plenty of margin of safety. Shares may continue to underperform in the short term. Still, the market is a voting machine in that period and a weighing machine in the long term.
Investors who ignore the market fluctuations should take advantage of the volatility. By aggressively taking a bullish position whenever the stock dips, investors get a proven semiconductor stock at discounted prices.
Risks
Russia’s invasion of Ukraine added geopolitical risks for Taiwan. Fears that China would invade Taiwan hurt TSMC’s stock price. China is watching the West’s reaction to Russia’s actions closely.
After the West’s unified response to Russia, China may hesitate in taking any action against the island. The West imposed economic sanctions that will hurt Russia. In addition, China would face SWIFT sanctions that would cripple trade.
China’s President Xi Jinping is campaigning for re-election this year. As he seeks a permanent position, he cannot afford to destabilize the country’s economy. The country is better off leaving Taiwan alone.
TSM stock trades at a discount of at least 10% to price the invasion risks. Markets will eventually remove the discount as geopolitical worries ease. In the quarter ahead, investors will price in Taiwan Semiconductor’s strong Q1/2022 guidance. The company expects revenue of between $16.6 billion and $17.2 billion. The gross profit margin is between 53% to 55%. The operating profit margin is between 42% and 44%.
Related Investments
Investors may consider AMD stock for direct exposure to the personal computer market. Intel is a good value proposition in that space, too. Furthermore, INTC stock is four times cheaper than AMD stock on a price-to-earnings measure. Intel pays shareholders a $1.46 annual dividend.
Qualcomm (NASDAQ:QCOM) also trades at a discount. The company supplies 5G chips and Snapdragon processors for smartphones. Skyworks Solutions (NASDAQ:SWKS) trades at a steep discount. Investor sentiment is poor for analog and wireless semiconductor companies.
The Bottom Line
Taiwan Semiconductor will perform well in the next decade. In 2022, demand for 7nm will continue. 5nm demand will accelerate, lifting the company’s gross margins. Investors seeking value may take advantage of the market’s fear of global events that are out of the company’s control. The wide discount will eventually shrink as the negative sentiment reverses.
TSM is a compelling value investment for conservative investors seeking exposure to the technology sector.
On the date of publication, Chris Lau 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.
