President Joe Biden's administration has allocated $11.6 billion to support semiconductor manufacturing in the US. Under the CHIPS and Science Act of 2022, Taiwanese giant TSMC will receive the most support in the form of grants and loans to build factories in Arizona, alongside companies such as Intel Corp. and Samsung Electronics Co. TSMC's new factory will create state-of-the-art 2-nanometre semiconductors, largely used in the development of artificial intelligence. These investments are particularly important for the United States as they ensure that the country remains internationally competitive. This raises the question: is an investment in the Taiwan Semiconductor Manufacturing Company currently a good choice?
Table of contents:
What is TSMC's business?
Taiwan Semiconductor Manufacturing Company (TSMC) is the world's leading independent contract semiconductor manufacturer. It specialises in manufacturing chips for leading global technology companies including Apple, AMD, Nvidia and Qualcomm. TSMC provides manufacturing services using cutting-edge technology, enabling the production of semiconductors as small as 7 nanometres and smaller. These advanced integrated circuits are essential for state-of-the-art processors and graphics cards, playing a key role in the development of artificial intelligence. TSMC is one of the key companies in this segment.
Source: TSMC quarterly report
The company plays an important role in the global semiconductor supply chain, supporting fabless companies (e.g. Nvidia or AMD) that specialise in designing and selling, among other things, graphics cards. As a result, whichever company succeeds in the area of artificial intelligence, TSMC is very likely to benefit.
Source: MacroMicro
According to Statista, TSMC currently holds as much as 61.2% of the market share of semiconductor manufacturers, successively increasing its position over the last five years. In second place is Samsung with 11.3% of the market share, followed by US-based GlobalFoundries in third place with 5.8% of sales in this market.
Source: Counterpoint
TSMC's financial situation
Intel, one of TSMC's main competitors, manufactures semiconductors used in processors and graphics cards. Despite the growing popularity of artificial intelligence, Intel reported a loss of $482 million from its chip manufacturing operations in 2023. This caused a decline in the value of the stock, which saw significant weakness despite the overall bull market of AI-related companies.
Source: Conotoxia MT5, Intel, Weekly
TSMC reported a 34.3% year-on-year increase in net profit in March, recovering from a months-long slowdown. The average annual profit growth rate for the last 15 years was an impressive 13.4%.
Source: MacroMicro
TSMC's net profit margin continues to be one of the highest in the company's history at 40%, against an industry average of 14%, demonstrating TSMC's strong competitive position. The high margin is the result of an increased share of sales of 7nm and smaller chips, which have significantly higher margins. The company's return on equity (ROE) is 28%, against an industry average of 14.4%, demonstrating that TSMC uses its capital much more efficiently than its competitors.
TSMC's advantage is also expressed in its strong self-financing ability. The debt-to-equity ratio is only 0.28. The company does not encounter liquidity problems, as evidenced by its quick ratio of 2.13. This means that for at least two years TSMC could sustain itself solely on its most liquid assets.
In summary, despite recent declines in revenue and profit, TSMC and the semiconductor market as a whole maintains a strong financial position due to high net profit margins, efficient use of capital and the ability to self-finance. The company's low debt-to-equity ratio and high quick ratio underscore its stability. TSMC remains a leader in advanced chip manufacturing, which provides a competitive advantage in the semiconductor market.
How much are TSMC shares worth?
In order to assess whether an investment in TSMC shares is worthwhile, it is crucial to understand their value. As Professor Aswath Damodaran points out, 'keep your eyes on the price' before making investment decisions.
Analysing the available data, we note analysts' cautious approach to the future of the semiconductor sector. The consensus expectation is for earnings per share to grow by 23.5% over the next 12 months, with projected average growth of 4.3% over the next five years. Given the company's minimal debt, we can assume that the expected return will be equal to the long-term average return for the S&P 500 index of 8.9% per annum, which we will use as a discount rate.
Despite its substantial investment, the company pays out a large proportion of the profits earned to investors, as much as 83%, in the form of dividends and share buybacks. This suggests that the current value of the shares could be US$181, giving them a potential upside of 24.4%. By the end of the year, their intrinsic value could oscillate around as much as US$191.7. This means that even under conservative assumptions, TSMC shares could still have upside potential.
Source: Conotoxia own analysis
Grzegorz Dróżdż, CAI MPW, Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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