Should You Hold Taiwan Semiconductor (TSM)? - InvestingChannel

Should You Hold Taiwan Semiconductor (TSM)?

Proprietary Data Insights

Financial Pros’ Top Semiconductor Stock Searches in the Last Month

Rank Ticker Name Searches
#1 NVDA Nvidia Corp 317
#2 AMD Adv Micro Devices 129
#3 INTC Intel Corp 64
#4 TSM Taiwan Semiconductor Manufacturing 62
#5 AVGO Broadcom Ltd 27
#ad A 96% Win Rate – in a Simple Options Trade

Should You Hold Taiwan Semiconductor (TSM)?

Taiwan Semiconductor (TSM) is the backbone of the semiconductor industry.

Its foundry business (manufacturing chips) competes directly with Intel (INTC), producing processors for a who’s who of tech companies, including Advanced Micro Devices (AMD), Nvidia (NVDA), Apple (AAPL), and Qualcomm (QCOM).

While 2023 was a challenging year, 2024 looks bright, with Q1 sales up 12.9%, with full-year guidance setting sales growth at the low to mid 20% range.

AI chips are a key driver for TSM’s projections, which is why we expect the company’s stock to keep ratcheting higher.

But at current prices, is this stock right for your portfolio?

Taiwan Semiconductor’s Business

Not everyone knows this, but companies like Nvidia and AMD don’t make their processors. They only design them.

The manufacturing is outsourced to foundries like TSM and Intel.

Yet, for the better part of two decades, TSM has been the clear winner of the two.

As a foundry, TSM invests in capital equipment to manufacture microprocessors. It serves everyone from the smartphone industry to high-end graphics.

Its business breaks down into the following platforms:

  • Smartphones (39% of revenues) – Specializes in producing advanced chips that power a broad spectrum of smartphones, from high-end to budget-friendly models.
  • High-Performance Computing (46% of revenues) – Focuses on manufacturing chips for servers, gaming computers, and other devices requiring significant processing power.
  • Internet of Things (6% of revenues) – Supplies semiconductors for a myriad of connected devices, enhancing the functionality and efficiency of IoT ecosystems.
  • Automotive (6% of revenues) – Develops chips that are critical for the modern automotive industry, including those used in electric vehicles, infotainment systems, and driver-assistance technologies.
  • Data Communications Equipment (2% of revenues) – Produces semiconductors that facilitate data transmission and networking in an increasingly connected world.
  • Others (2% of revenues) – Encompasses a range of services and products outside the primary categories, including design and development services.


Source: TSM Q1 2024 Earnings Slides

TSM announced plans to build a third fabrication plant in Arizona in early April. The first plan is expected to begin production in 2025, helping bring more manufacturing into the U.S. and reducing geopolitical risk.



Source: Stock Analysis

TSM’s gross margins have compressed slightly in recent years. However, management forecasts that they will remain steady in 2024, as will operating margins.

Free cash flow margins were down near 14%. That’s expected to increase slightly as Capex lands around $28-$30 billion for 2024.



Source: Seeking Alpha

As a manufacturer, TSM garners a lower P/E ratio and price-to-cash flow, similar to Intel’s.

Yet, its better margins and growth will often garner a premium, especially in the price-to-sales ratio and price-to-cash flow.

We can also see the price-to-book ratio is higher for TSM, highlighting investor expectations it will do more with every dollar of assets it owns.



Source: Seeking Alpha

Neither Intel nor TSM saw much growth in 2023. However, that will change in 2024.

TSM is forecast to increase sales by +20% overall, though analysts have pegged them closer to 10%.

Intel will be lucky to generate the same sales levels as 2023.

TSM is also expected to see its profits grow as margins begin to improve steadily.



Source: Seeking Alpha

Speaking of margins, TSM’s EBITDA certainly beats out anyone on this list. And its net income margin is second only to Nvidia.

That’s helped them deliver solid returns on equity, assets, and total capital.


Our Opinion 8/10

Taiwan Semiconductor is what we’d consider the picks-and-shovels play of the semiconductor space.

And unlike Intel, TSM has increased sales and improved performance despite inflationary and geopolitical pressures.

We expect their new U.S. plants to help improve margins even further, though it will take years to realize their full potential.

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