Is Taiwan Semiconductor Still a Buy Despite Short-Term Risks?

Taiwan Semiconductor Manufacturing Company Limited (TSMC) is a dominant player in the semiconductor industry, holding a significant market share and serving major tech companies globally. As of September 7, 2024, TSMC’s stock price stands at $156.82, reflecting a recent decline amid broader market sell-offs and geopolitical tensions. This report critically examines whether TSMC remains a viable investment despite short-term risks, leveraging recent financial data, market trends, and expert analyses.

Introduction

Financial Performance and Market Position

Recent Financial Metrics

As of September 6, 2024, TSMC’s stock price is $156.82, down 4.20% from the previous day. The company boasts a market capitalization of approximately $745.22 billion, with a trailing twelve-month revenue of $75.06 billion and a net income of $28.41 billion. The earnings per share (EPS) stands at $1.10, with a price-to-earnings (PE) ratio of 26.23 and a forward PE of 19.19. These metrics indicate a robust financial foundation, albeit with some recent volatility.

Dividend and Analyst Ratings

TSMC offers a dividend of $2.47, yielding 1.57%, with an ex-dividend date of December 12, 2024. Analysts have rated TSMC as a “Strong Buy,” with a 12-month price target of $207.50, suggesting a potential upside of 32.32%. This optimistic outlook is supported by TSMC’s strong market position and growth prospects, particularly in the AI chip sector.

Market Share and Client Base

TSMC holds a commanding 62% market share in the semiconductor foundry market, significantly ahead of its closest competitor, Samsung, which holds 14%. The company serves major tech giants like Nvidia and Apple, positioning it as a critical player in the technological advancements driving the industry. This diversified client base mitigates risks associated with reliance on a single customer or sector.

Short-Term Risks and Challenges

Market Volatility and Economic Concerns

The semiconductor sector has recently experienced a broader sell-off, influenced by bearish momentum following Nvidia’s stock performance and disappointing earnings from peers like Broadcom. TSMC’s stock fell 4.2% amid this downturn, reflecting broader market concerns. Additionally, a weaker-than-expected jobs report for August 2024 has heightened recession fears, further contributing to market volatility.

Geopolitical Tensions

Geopolitical tensions between China and Japan regarding chip export restrictions have added to investor concerns about TSMC’s long-term risks. The U.S. has been pressing Japan to limit exports of advanced chipmaking technology to China, with Beijing threatening economic retaliation. These geopolitical dynamics could impact TSMC’s supply chain and market access, posing significant risks.

Cyclical Nature of the Semiconductor Industry

The semiconductor industry is known for its cyclical nature, leading to volatility in stock prices. Despite long-term growth prospects, the current sentiment is cautious, especially after a significant run-up in stock prices due to AI enthusiasm since November 2022. Analysts have noted that while demand for AI chips continues to grow, the outlook for legacy and non-AI chips remains downbeat for the next six to nine months.

Growth Prospects and Strategic Initiatives

AI and Advanced Chip Technology

TSMC is expected to benefit significantly from strong demand for AI chips, with a notable 45% revenue increase reported in July 2024 compared to the previous year. The company is a leader in producing advanced chips, including 3nm and 2nm technologies, which are critical for AI and high-performance computing applications. TSMC’s ability to innovate and stay ahead of technological trends positions it well for future growth.

Global Expansion and Diversification

TSMC is expanding its global presence, including plans to build an €11 billion ($11 billion) plant in Germany. This strategic move aims to mitigate geopolitical risks and diversify its manufacturing footprint outside Taiwan. Additionally, TSMC’s strong balance sheet and government incentives support its expansion efforts, further strengthening its market position.

Revenue and Earnings Growth Projections

Analysts project TSMC’s adjusted earnings to grow by 25% in 2024 and 28% in 2025, with revenue growth expected at 24% for both years. These projections underscore the company’s robust growth potential, driven by increasing demand for advanced chips and technological advancements. If TSMC achieves a 15% revenue CAGR, it could generate $134 billion in revenue and $50.9 billion in profits by 2028, implying a 14% upside based on a P/E ratio of 20.

Investment Outlook and Recommendations

Valuation and Analyst Opinions

Despite recent stock declines, TSMC’s valuation remains attractive. The stock is currently trading at a 40% discount from its 10-year high, priced at 20.9X forward 12-month earnings, which is 20% lower than the Zacks Tech sector average. Analysts have identified TSMC as a strong candidate for buying on the dip, given its competitive advantages and continued demand in the semiconductor industry.

Dividend Reliability and Long-Term Growth

TSMC pays a reliable dividend with a yield of 1.74%, and the upcoming ex-dividend date is September 12, 2024, with a payout scheduled for October 9, 2024. This dividend reliability, coupled with strong long-term growth prospects, makes TSMC an attractive investment option for income-focused investors. The company’s leadership in innovation and growth potential in the AI sector further bolster its investment appeal.

Risk Mitigation Strategies

Investors should be aware of the short-term risks associated with TSMC, including market volatility, geopolitical tensions, and cyclical industry dynamics. However, TSMC’s strategic initiatives, such as global expansion and technological advancements, are designed to mitigate these risks. Diversifying investments across multiple sectors and maintaining a long-term perspective can help investors navigate the current market environment.

Conclusion

In conclusion, Taiwan Semiconductor Manufacturing Company Limited (TSMC) remains a compelling investment despite short-term risks. The company’s strong financial performance, market leadership, and growth prospects in the AI and advanced chip sectors position it well for future success. While recent market volatility and geopolitical tensions pose challenges, TSMC’s strategic initiatives and robust growth projections make it an attractive option for long-term investors. Therefore, TSMC is still a buy, provided investors are prepared to navigate the short-term risks and maintain a long-term investment horizon.