Why Taiwan Semiconductor is stepping up investment

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Taiwan semiconductor (NYSE:TSM) is the world’s largest semiconductor manufacturer, which puts it in a unique position in the face of the global chip shortage. That’s why it’s spending more than $40 billion on capital expenditures this year.

In this episode of “Beat and Raise”, recorded on January 20dope contributors Will Healy and Brian Withers discuss Taiwan Semi’s prospects and why it has such a strong competitive position.

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Brian Wither: Looking for Will to talk about semiconductors, one of the world’s largest semiconductor companies, Taiwan Semi.

Will Healy: Well, I’ll dive right into it. Fourth quarter revenue was $15.7 billion. That was up 21%, which exceeded expectations, and also know that $15.7 billion is their number. I mean, Taiwan uses New Taiwan dollars, but they translate their numbers to dollars, so I’m using their info here.

Earnings per share were $1.15, an increase of 16%. It was also a beat. However, note that revenues grew faster than profits. I think it’s because they’re investing so much in the business and they have to increase their capacity due to the shortage of chips and they’re also doing research to advance the technology so there’s a some pressure there.

However, the outlook for the first quarter is $16.9 billion, up 26% year-over-year and that’s also an increase from where analysts were putting it. I mean, overall it was a good quarter, except for earnings not following revenue.

Some things to note for TSMC, in Q3 they had 53% of the foundry market. It is interesting because companies like Nvidia (NASDAQ: NVDA)Like AMD (NASDAQ: AMD), Qualcomm (NASDAQ: QCOM), they are fabless, so they rely on TSMC to build their chips. If anything happened to TSMC, the industry would be almost in the dark ages. So it’s probably the biggest company in the industry, if not any industry.

I spoke earlier about expenditures. They plan to spend $40 billion to $44 billion in capital spending this year, and that’s a huge amount of money and it could contribute to the shortfall that ultimately drove up earnings. However, I think they have to because all of their competitors are increasing their capacity. Again, they must continue to advance technology to maintain their technical lead. It makes perfect sense that they are spending so much to maintain their position in the market.

As for the stock, it trades at around 34 times earnings. I would call this a mid-level assessment. You have stocks, customers like Nvidia and AMD are trading at significantly higher multiples while Qualcomm and Intel are much lower. It’s really in the middle. Unfortunately, that hasn’t translated into gains over the past year, as it’s been trading relatively flat compared to what it used to be.

Withers: It’s flat for the year, but if you go back to the five-year chart, it’s up 333%, and that’s not even including dividends, so it’s been great. I feel like maybe he’s just backing off. Many of my tech stocks over the past year are either flat or in some cases down. So it’s no surprise that this bedrock of the tech community, especially during the silicon shortage, is taking a little pause on the stock price.

Healy: It’s an interesting time because we’ve been hearing about the shortage all year and like I said, their Nvidia and AMD customers, those stocks are doing so much better. I don’t think people fully appreciate TSMC’s role in the industry, and they might be a little hesitant because it’s based in Taiwan and China has talked about invading Taiwan, although I don’t think that’s actually happen, but you still have to look over your shoulder. I think stocks are trading at a discount because of this factor.

Withers: We’re running out of time here. I’m going to ask you the same question I asked Toby. AF, how would you rate Taiwan’s semiconductor district?

Healy: I would say it was A-minus. The only really negative thing I can say is that the revenue hasn’t quite followed, but I think, as I said, they need to spend that money. They have the technical lead right now, but those technical leads are really tenuous even though a lot of people think no one can catch them. People left AMD for dead a few years ago and for decades, Intel (NASDAQ: INTC) had the technical lead and everyone thought it was insurmountable. In this industry, you always have to look over your shoulder.

Withers: Yeah. Only the paranoid survive, the former Intel CEO would say.

Brian Withers has no position in the stocks mentioned. Jeremy Bowman has no position in the stocks mentioned. Will Healy has no position in the stocks mentioned. The Motley Fool owns and recommends Advanced Micro Devices, Intel, Nvidia, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: $57.50 long calls on Intel in January 2023 and $57.50 short puts on Intel in January 2023. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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