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Investment Thesis

Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) proved that global supply chains have yet to impact its current earnings, while reporting record-breaking FQ1’22 earnings and expanding gross margins. Investors should also be encouraged that the company will retain its profitability moving forward, given that it is raising prices from 2023 onwards. Furthermore, through its aggressive Capex and R&D investments, we are also confident that TSM will retain its massive market share in the semiconductor foundry industry through the next decade. Thanks to its long-term expertise, mastery of the industry’s complicated supply chains, and expanding global production capabilities.

Therefore, tech investors would be wise to add some exposure to TSM during this dip, which will likely remain among the world’s most influential companies for a long time to come.

TSM Showed The World Why They Are The King In The Foundry Industry

TSM Revenue, Net Income, and Gross Margin

TSM Revenue, Net Income, and Gross Margin

S&P Capital IQ

In the past five years, TSM reported tremendous revenue growth at a CAGR of 14.41{4e908c29df01d999f087e4f922633998e2ded1c72f05851cd6252034960daee5}, while its net income grew faster at 16.06{4e908c29df01d999f087e4f922633998e2ded1c72f05851cd6252034960daee5}. In addition, the company managed to hold its gross margins steady at over 50{4e908c29df01d999f087e4f922633998e2ded1c72f05851cd6252034960daee5} throughout the years. In FQ1’22 alone, TSM reported record-breaking revenues of $17.14B, representing a remarkable increase of 8.4{4e908c29df01d999f087e4f922633998e2ded1c72f05851cd6252034960daee5} QoQ and 34.6{4e908c29df01d999f087e4f922633998e2ded1c72f05851cd6252034960daee5} YoY. Furthermore, its net income also grew to $7.08 by 18.1{4e908c29df01d999f087e4f922633998e2ded1c72f05851cd6252034960daee5} QoQ and 44.1{4e908c29df01d999f087e4f922633998e2ded1c72f05851cd6252034960daee5} YoY, given its expanding gross margin of 55.6{4e908c29df01d999f087e4f922633998e2ded1c72f05851cd6252034960daee5} in FQ1’22.

TSM Cash/ Equivalents, FCF, And FCF Margins

TSM Cash/ Equivalents, FCF, and FCF Margins

S&P Capital IQ

TSM is also a highly profitable Free Cash Flow (FCF) company, with an impressive $14B of FCF and 23.5{4e908c29df01d999f087e4f922633998e2ded1c72f05851cd6252034960daee5} of FCF margins in the last twelve months (LTM). Furthermore, the company has a growing war chest of cash and equivalents of $40.2B by FQ1’22. As a result, TSM is highly equipped for its aggressive expansion in production capabilities in Taiwan, Japan, and the US, given the increasingly tense geographical climate.

TSM Net Property Plant/ Equipment And Capital Expenditure

TSM Net Property Plant/ Equipment and Capital Expenditure

S&P Capital IQ

It is evident from the chart that TSM has been expanding its production capabilities in the past three years, with a total of $39.49B of investment in its Net Property Plant and Equipment since FY2018. In addition, the company is also growing its capital expenditures to increase its global presence in Japan for 22/28-nm production technology and the US for 5-nm technology. Nonetheless, with the global push for the latest 2-nm technology, we may potentially see TSM increase its production capabilities to add 2 nm production in its US plant, as its competitors, Samsung (OTC:SSNLF) and Intel (INTC), sought to conquer the latest technology by 2025.

TSM R&D Expenses And R&D To Revenue {4e908c29df01d999f087e4f922633998e2ded1c72f05851cd6252034960daee5}

TSM R&D Expenses and R&D to Revenue {4e908c29df01d999f087e4f922633998e2ded1c72f05851cd6252034960daee5}

S&P Capital IQ

It is also evident that TSM is aggressively investing in its growth, given its continuous R&D expenses over the years. As its revenue grew in strength, the company pumped more, in order to ensure its competitiveness in product innovations through 3 nm, 2 nm, and 1.8 nm production technologies. Given that the R&D expenses still constitute approximately 7{4e908c29df01d999f087e4f922633998e2ded1c72f05851cd6252034960daee5} of its revenues, we expect TSM to retain its leadership in the semiconductor foundry industry with the lion’s market share of over 50{4e908c29df01d999f087e4f922633998e2ded1c72f05851cd6252034960daee5}, since the 2nd in line, Samsung, only reports 18.3{4e908c29df01d999f087e4f922633998e2ded1c72f05851cd6252034960daee5} by FQ4’21.

Though INTC planned to enter the foundry industry with the 1.8 nm and/or 2 nm technology based on ASML‘s latest EUV machines, TWINSCAN EXE:5000 and EXE:5200 systems, by 2025, we are confident that TSM will still retain its leading status moving forward. As a new player with entirely new technology, INTC would face multiple roadblocks in achieving the same success and production scale as TSM. In contrast, TSM will utilize its long-term expertise, skilled labor, and excellent command of the semiconductor’s complicated supply chain to excel as it pushes out the 3 nm technology by H2’22 and 2 nm by 2025. As a result, INTC would most certainly be a few steps too late by then.

TSM Projected Revenue And Net Income

TSM Projected Revenue and Net Income

S&P Capital IQ

Over the next two years, TSM is expected to report revenue and net income growth at a CAGR of 16{4e908c29df01d999f087e4f922633998e2ded1c72f05851cd6252034960daee5} and 13{4e908c29df01d999f087e4f922633998e2ded1c72f05851cd6252034960daee5}, respectively. Consensus estimates that the company will report revenues of $70.15B and a net income of $28.81B, representing impressive YoY growth of 22.5{4e908c29df01d999f087e4f922633998e2ded1c72f05851cd6252034960daee5} and 34{4e908c29df01d999f087e4f922633998e2ded1c72f05851cd6252034960daee5}, respectively. In addition, TSM guided FQ2’22 revenues in the range of $17.6B to $18.2B, representing a tremendous increase of 6.1{4e908c29df01d999f087e4f922633998e2ded1c72f05851cd6252034960daee5} QoQ and 36.5{4e908c29df01d999f087e4f922633998e2ded1c72f05851cd6252034960daee5} YoY. Furthermore, the company expects to further expand its gross margins to 58{4e908c29df01d999f087e4f922633998e2ded1c72f05851cd6252034960daee5} for the next quarter. The global semiconductor market is also expected to grow from $452.2B in 2021 to $893.1B in 2029, at a CAGR of 9.2{4e908c29df01d999f087e4f922633998e2ded1c72f05851cd6252034960daee5}, aided by the push for 5G technology, edge computing, and autonomous EVs, amongst others.

Though there may be concerns about TSM’s future due to the ongoing political tensions between China and the US, we are not that concerned, given the multiple sanctions on Russia for the Ukraine invasion, President Xi’s goal of 5.5{4e908c29df01d999f087e4f922633998e2ded1c72f05851cd6252034960daee5} GDP growth for China in 2022, and his impending third term election in November 2022. As a result, it is evident that TSM will continue its stellar growth moving forward, given its highly relevant foundry business in the increasingly digitalized and cloud-connected world.

So, Is TSM Stock A Buy, Sell, Or Hold?

TSM 5Y EV/Revenue and P/E Valuations

TSM 5Y EV/Revenue and P/E Valuations

S&P Capital IQ

TSM is currently trading at an EV/NTM Revenue of 6.24x and NTM P/E of 15.89x, lower than its 5Y mean of 6.63x and 19.79x, respectively. It is evident that the stock currently trades near its bottom valuation, after the massive rally and then moderation in the past two years. In addition, the stock is also priced attractively at $90.53 on 18 May 2022, down 37.5{4e908c29df01d999f087e4f922633998e2ded1c72f05851cd6252034960daee5} from its 52 weeks high of $145, given its 5Y stock price appreciation by 157.19{4e908c29df01d999f087e4f922633998e2ded1c72f05851cd6252034960daee5}.

TSM 5Y Stock Price

TSM 5Y Stock Price

Seeking Alpha

As a result, we concur with consensus estimates which put TSM at fair value now, given its proven execution, expanding production capabilities, and moderation in valuation. As a result, interested investors may utilize this opportunity to gain greater exposure to TSM, which will remain one of the world’s most influential companies in this and, most certainly, next decade.

Therefore, we rate TSM stock as a Buy.


By admin

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