Favorable government initiatives and the high consumption of consumer electronics, the production of electric and autonomous vehicles, mobile phones, medical equipment, and various other products are poised to drive the growth prospects of the semiconductor industry.
Given this backdrop, let us probe into the semiconductor stock Taiwan Semiconductor Manufacturing Company Limited (TSM) and explore whether the chip stock could be an ideal portfolio addition or not.
The Semiconductor Industry Association (SIA) recently announced that global semiconductor industry sales were $40 billion during April 2023, an increase of 0.3% compared to March. The global semiconductor market is projected to reach $1.38 trillion in 2029, exhibiting a CAGR of 12.2% between 2022 and 2029.
Industrial tailwinds should bode well for the company. Headquartered in Hsinchu City, Taiwan, TSM provides integrated circuits and other semiconductor devices internationally.
On June 8, TSM announced the opening of its Advanced Backend Fab 6, the company’s first all-in-one automated advanced packaging and testing fab to realize 3DFabric integration of front-end to back-end process and testing services. This would also enable TSM to flexibly allocate capacity for TSMC 3DFabric advanced packaging and silicon stacking technologies.
Moreover, it would support AI, mobile applications, and other products and help customers achieve product success and win market opportunities. In addition to unleashing an exceptional innovation, it would enhance TSM’s chances of becoming an important partner that customers trust in the long term.
On April 21, the company signed a 20,000 GWh renewable energy joint procurement contract with ARK Power, a subsidiary of ARK Solar Energy. The agreement enables TSM suppliers and subsidiaries to purchase renewable energy and assists with electricity evaluation and planning services.
In addition to reducing around 500,000 metric tons of carbon emissions per year and promoting a sustainable low-carbon semiconductor supply chain, the joint venture would enhance TSM’s business matching opportunities with renewable energy developers and promote the development of the domestic renewable energy industry.
Furthermore, TSM’s management expects revenue for the fiscal second quarter of 2023 to be between $15.20 billion and $16 billion. Its gross profit margin is expected to arrive between 52% and 54%, while its operating profit margin is expected to come between 39.5% and 41.5%.
Shares of TSM have gained 28% over the past month and 32.7% over the past six months to close the last trading session at $106.80. The stock is trading above its 50-day and 200-day moving averages of $90.75 and $83.07, respectively, indicating an uptrend.
Wall Street analysts expect the stock to reach $121 in the upcoming 12 months, indicating a potential upside of 13.3%.
Here’s what could influence TSM’s performance in the upcoming months:
Robust Financials
On a consolidated basis, TSM’s net revenue for May 2023 was NT$176.54 billion ($5.76 billion), indicating an increase of 19.4% from April 2023.
TSM’s net revenue increased 3.6% year-over-year to $16.72 billion in the fiscal first quarter that ended March 31, 2023. Its gross profit grew 4.9% from the prior year’s quarter to $9.42 billion, while its income from operations came in at $7.60 billion, up 3.3% year-over-year.
TSM’s net income and EPS increased 2% and 2.1% year-over-year to $6.80 billion and $1.31, respectively. For the same quarter, its cash and cash equivalents stood at $45.53 billion. Moreover, its total current assets grew 15.9% year-over-year to $65.60 billion as of March 31, 2023.
Attractive Dividend
On May 9, 2023, TSM’s board of directors approved the distribution of a NT$3.00 per share cash dividend for the first quarter of 2023, payable to the shareholders on October 12. Its annual dividend of $1.78 translates to a 1.67% yield on the current price. Its four-year average dividend yield is 2.36%. The company’s dividend payouts have grown at a 9.3% CAGR over the past five years.
Favorable Analyst Estimates
Analysts expect TSM’s revenue and EPS for the current fiscal year (ending December 2023) to come in at $70.96 billion and $5.05, respectively. In addition, the company’s revenue and EPS for the next fiscal year ending December 2024 are expected to grow 20.5% and 24.2% year-over-year to $85.49 billion and $6.28, respectively.
For the fiscal third quarter ending September 2023, Street expects TSM’s revenue and EPS to come in at $18.13 billion and $1.17, respectively.
Moreover, it surpassed the consensus EPS estimates in each of the trailing four quarters.
High Profitability
TSM’s trailing 12-month EBIT and net income margins of 49.47% and 44.74% are significantly higher than the industry averages of 4.31% and 1.97%, respectively. In addition, TSM’s trailing-12-month ROCE and ROTC of 37.86% and 19.80% are considerably higher than the industry averages of 0.23% and 1.63%, respectively.
Its trailing-12-month CAPEX/Sales of 49.22% is significantly higher than the 2.28% industry average.
POWR Ratings Reflect Promising Prospects
TSM’s POWR Ratings reflect a promising outlook. It has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. TSM has an A grade for Quality, consistent with its higher-than-industry profitability metrics.
In addition, TSM has an A grade for Momentum, consistent with the stock trading higher than its moving averages. The stock also has a B grade for Sentiment, in sync with favorable analyst estimates.
TSM is ranked #26 out of 91 stocks in the Semiconductor & Wireless Chip industry. To access TSM’s Growth, Value, and Stability ratings, click here.
Bottom Line
World’s leading semiconductor company TSM’s growth prospects look bright. The company’s persistent enhancements and advancements of process technologies with more power efficiency, performance, and functionality are anticipated to keep their pipeline of innovation continuously flowing for the upcoming years.
Moreover, even though a weakening macroeconomic condition has tampered with the performance of the chip stocks, TSM’s persistent rewards to its shareholders for 18 years in the form of dividends have enabled shareholders to earn a stable return.
Coupled with the promising industrial prospects, the company’s solid financials, high profitability, and noteworthy growth prospects could make this chip stock a wise portfolio addition for June.
How Does Taiwan Semiconductor Manufacturing Company Limited (TSM) Stack Up Against Its Peers?
While TSM has been rated B, equating to a Buy, one can check out these other stocks within the Semiconductor & Wireless Chip industry: SUMCO Corporation (SUOPY), Renesas Electronics Corporation (RNECF), and Infineon Technologies AG ADR (IFNNY), which have an A (Strong Buy) rating.
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TSM shares fell $0.42 (-0.39%) in premarket trading Wednesday. Year-to-date, TSM has gained 43.53%, versus a 14.76% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.
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