To The Moon

$Taiwan Semiconductor Manufacturing(TSM)$

Earning Overview

TSMC recently released their financial results, and the numbers are simply remarkable. Revenue has surged by 38.8% year-over-year, while net income has skyrocketed by 57.1%. That's truly impressive. Cash has also risen by 45.2%, although there was a 5.7% dip in other areas. As investors, we should focus on the long-term outlook rather than short-term fluctuations. Today, we'll dive into a seven-step analysis to evaluate just how crucial TSMC is for the global economy, explore its potential future, and assess whether it presents an attractive investment opportunity or if the risks are too high.

Fundamental Analysis

Taiwan Semiconductor Manufacturing Company is responsible for about 90% of the world’s most advanced computer chips. Its products are essential for major companies like Nvidia, Apple, and Tesla, making TSMC one of the most important companies globally. Although the company operates mostly in Taiwan, with additional facilities in Japan, China, and the United States, its operations in Taiwan remain the primary site for its most advanced chips. This geographical diversification provides some protection in case of geopolitical tensions between Taiwan, the US, and China.

If you had invested $1,000 in TSMC 10 years ago, you would have acquired 44 shares. Today, those shares would be worth nearly $963,000—a phenomenal return. The growth shows no signs of slowing down, with TSMC’s shares having increased by around 81% last year.

Looking at the company’s ownership, individual insiders own about 0.4% of TSMC, and while we'd prefer this figure to be over 2%, TSMC's history as a state-backed project means the majority of the leadership has equity, which is a positive sign. Insider buying has been minimal recently, and the 12 prominent investors backing TSMC—such as David Roel, Steven Mandel, and Chase Coleman—believe in its future, even though they've recently sold more shares than they bought.

Let’s take a closer look at the company’s financial performance. TSMC has achieved a return on invested capital of 21.6%, well above the desired 10%, and its 5-year net profit margin has averaged an impressive 38.4%, compared to the industry’s 5.2%. These figures highlight the company's strong position in the semiconductor ecosystem.

Guidance

On the downside, TSMC has not been buying back shares, and its debt level is manageable, with enough free cash flow to pay off its long-term obligations in just over a year. In terms of growth, TSMC has delivered a solid 13.2% compound annual revenue growth over the last decade, along with a free cash flow growth of 16.6% and earnings per share growth of 16%. While faster-growing companies exist, TSMC’s organic growth without relying on debt or new shares makes its trajectory much more sustainable.

Dividend

For those seeking dividends, TSMC offers a 1.1% yield, with a payout ratio of 34.7%, which is within the desired range. Dividend growth has been a solid 2.8% annually over the past five years, though TSMC isn’t primarily a dividend stock.

Free Cash Flow

In the fourth quarter of 2024, Taiwan Semiconductor Manufacturing Company (TSMC) reported a free cash flow of approximately TWD 620 billion (around USD 20.5 billion). This figure was derived by subtracting capital expenditures of TWD 362 billion from operating cash flow of TWD 620 billion.

For the full year 2024, TSMC's free cash flow totaled TWD 870 billion (approximately USD 29 billion). This was calculated by subtracting total capital expenditures of TWD 956 billion from operating cash flow of TWD 1.8 trillion.

Technical Analysis

Resistance Levels: $246.00: A projected bullish price target, contingent upon the stock surpassing previous highs.

Support Levels: $180.00: An significant support level, providing a cushion against deeper pullbacks.

Risks and Challenges

Geopolitical Risks: TSMC's operations are based primarily in Taiwan, which is at the center of geopolitical tensions between the US and China. Any escalation in these tensions could negatively impact the company’s ability to maintain its market leadership.

High Valuation: With a price-to-earnings ratio of 34.4, TSMC is seen as expensive compared to the broader market (S&P 500’s 27.9 PE). This has led some investors to be cautious about its current price, despite its strong fundamentals.

Supply Chain Risks: Being a global leader, TSMC is affected by global supply chain issues, which can impact production timelines and delivery.

Valuation

Looking at TSMC’s valuation, its price-to-earnings ratio is 34.4, higher than the S&P 500’s average of 27.9, signaling that the company is quite expensive. Given its stellar performance and geopolitical risks, the valuation might not seem too surprising, but it's important to remember that no company is worth an infinite price.

To estimate TSMC's intrinsic value, we used a discounted cash flow analysis, with growth estimates for the next 10 years based on three scenarios: low (12% growth for the first 5 years), medium (15%), and high (19%). The intrinsic value in the low, medium, and high scenarios is $131, $167, and $214, respectively. Applying a 30% margin of safety, these values decrease to $91, $116, and $150. With the current price around $221, TSMC is undoubtedly expensive, but the price isn’t out of reach given its importance in the tech industry and the world economy.

Market sentiment

The market sentiment surrounding TSMC (Taiwan Semiconductor Manufacturing Company) is generally positive, driven by its dominant position in the semiconductor industry, consistent financial performance, and crucial role in the global tech ecosystem. TSMC’s ability to manufacture around 90% of the world’s most advanced chips for major companies like Nvidia, Apple, and Tesla further boosts its attractiveness.

Dominance in the Industry: TSMC is a leader in the semiconductor manufacturing sector, producing cutting-edge chips essential for numerous industries, including AI, automotive, and consumer electronics.

Strong Financials: The company has seen impressive revenue, net income, and cash flow growth in recent years, underlining its operational strength and resilience. Its 5-year net profit margin and return on invested capital are notably above industry averages.

Geopolitical Importance: TSMC's strategic importance in the global supply chain and its influence on the tech industry make it a critical player. This has driven positive sentiment among investors and analysts.

Investor Confidence: The backing of prominent investors, such as David Roel, Steven Mandel, and Chase Coleman, signals confidence in the company's future. Despite recent insider selling, the company's leadership and overall market position remain strong.

Conclusion

Finally, TSMC has strong financial health, solid growth, and a dominant position in the semiconductor market. However, its high valuation and geopolitical risks make it a company that requires careful consideration. Despite these risks, if TSMC were to face challenges, the tech industry as a whole would likely experience significant setbacks.

In comparison to other semiconductor companies, TSMC stands out with the highest profit margins, low debt, and strong overall performance, even though its valuation places it somewhere in the middle of the pack.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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