Is Taiwan Semiconductor Stock Still a Buy?
Taiwan Semiconductor Manufacturing (TSMC) (NYSE: TSM) can be something of an enigma for investors. It dominates the advanced manufacturing of semiconductors, giving it an essential role in the supply chain of all leading chip companies.
Nonetheless, challenges unique to the company may make investors hesitate despite the company's obvious importance. Thus, investors need to take numerous factors into consideration before deciding whether TSMC is a buy.
The state of TSMC
Perhaps no company has benefited more from manufacturing outsourcing than TSMC. As more chip design companies decided it was better to outsource production, such semiconductor companies became more important.
TSMC and its competitor Samsung stood out because they were willing to invest whatever it took to manufacture the world's most advanced chips. Over time, that would lead TSMC to a 62% market share in the industry as of the first quarter of 2024.
However, when accounting for the advanced production, that percentage jumps to 90%. Moreover, cutting-edge niches such as the AI chip market have stood out for their rapid growth. Allied Market Research forecasts a compound annual growth rate (CAGR) of 38% for the AI chip market through 2032. This is well above the 6% CAGR the same researchers predicted for the overall semiconductor market.
Thus, TSMC benefits from its close relationship with Nvidia. Also, since it produces chips for Advanced Micro Devices, Qualcomm, Apple, and many others, it is at the center of this production.
Unfortunately, other factors give investors pause about TSMC. For one, most of its production is in Taiwan. Many investors have feared China would invade that island, an action that could destroy most of TSMC's production capacity, and such risks were enough for Warren Buffett to sell his TSMC stake.
One other worry is rising competition. Samsung is ramping up fab construction to better compete, and with the push to manufacture more in the U.S. and Europe, Intel is spending tens of billions annually to build the world's most advanced fabs away from Taiwan.
TSMC, financially speaking
For now, TSMC is likely benefiting from anticipated growth as revenue of almost $40 billion in the first half of 2024 grew 28% from year-ago levels.
Still, gross margins fell to 53% for that period compared to 55% in the first two quarters of 2023. The company blamed rising production costs for 3-namometer chips. That led to a net income of just under $15 billion, 22% more than last year.
Those rising costs did not stop TSMC stock from almost doubling in value. However, that increase brings rising concerns about its valuation. Thanks to the higher stock price, the P/E ratio recently surged to 31. This recent increase took the earnings multiple to its highest levels since the end of the 2021 bull market.
Additionally, fabs like TSMC have not commanded the P/E ratios of clients like Nvidia or AMD. That is likely because the market is accounting for its geopolitical challenges. Hence, investors should probably see that earnings multiple as high, possibly meaning the stock price may be ahead of the company's growth.
Is TSMC still a buy?
When considering all of the factors, TSMC stock remains a buy.
This call does not mean investors should dismiss TSMC's concerns. Indeed, an invasion of Taiwan is unlikely but possible. Still, the current P/E ratio is low enough to serve as a discount that accounts for its geopolitical dangers while being high enough that new investors should probably utilize dollar-cost averaging when purchasing the stock.
Moreover, investors should take notice of the rising competition, and it is possible Samsung and Intel might claim much of the advanced production. Nonetheless, a 38% CAGR on AI chips likely means a rising tide should lift all boats. Due to TSMC's status as the largest fab company, no "boat" is more likely to rise higher than Taiwan Semiconductor Manufacturing.
Should you invest $1,000 in Taiwan Semiconductor Manufacturing right now?
Before you buy stock in Taiwan Semiconductor Manufacturing, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Taiwan Semiconductor Manufacturing wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $710,860!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of September 16, 2024
Will Healy has positions in Advanced Micro Devices, Intel, and Qualcomm. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Nvidia, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.
Is Taiwan Semiconductor Stock Still a Buy? was originally published by The Motley Fool