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It’s Friday. Time to give you a stock pick from our sister newsletter, The Spill, so you can think about it over the weekend and maybe make a move Monday morning. While The Juice helps you be better with money across the board, The Spill focuses on stocks financial pros are researching and judges how good of buys they are. If you’re already sold, you can sign up for The Spill – for free – here. |
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Proprietary Data Insights Financial Pros’ Top Semiconductor Stock Searches in the Last Month
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Should You Hold Taiwan Semiconductor (TSM)? |
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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:
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. Financials
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. Valuation
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. Growth
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. Profitability
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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