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Bear of the Day: Taiwan Semiconductor (TSM)

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Semiconductor stocks have been on fire over the past few years, but recently, investors have grown concerned that the industry’s run might be nearing its end. With concerns that the semiconductor cycle is wrapping up, it is prudent to avoid those that are already struggling—including Taiwan Semiconductor Manufacturing Company (TSM - Free Report) .

Taiwan Semiconductor is the world's largest dedicated integrated circuit foundry. The company manufactures ICs for its customers based on their proprietary IC designs using its advanced production processes. Most leading fabless semiconductor companies, including Qualcomm (QCOM), AMD (AMD), and more, are customers of TSMC.

After a sluggish earnings report last month, TSMC is sporting a Zacks Rank #5 (Strong Sell) and looks a bit pricey for what you are getting.

Latest Earnings and Outlook

Taiwan Semiconductor most recently reported earnings on April 19. The company posted adjusted profits of $0.59 per share, missing the Zacks Consensus Estimate by a penny and moving just about 9% higher year over year. Revenue of $8.46 billion just edged out our consensus estimate of $8.45 billion.

TSMC’s outlook for the remainder of the year was not particularly encouraging, and since its report, analysts have adjusted their own estimates downward to match that. In fact, the company has seen two negative revisions to its full-year EPS estimates within the past 30 days, moving our consensus projection 15 cents lower in that time.

Stretched Valuation?

Shares of TSMC have fallen about 5% in the month since its latest earnings report, but the stock still looks overvalued in many ways. For instance, it is trading at about 16x forward 12-month earnings, which is a noticeable premium to the average of 13x seen in the broader semiconductor market.

Meanwhile, its P/S of 6.2, as well as its P/B of 3.8 and P/CF of 10.3, add credence to the idea that the stock is a bit pricy right now.

Bottom Line

Semiconductor investors are worried about the cycle coming to an end, so why pay a premium for a chip supplier with a sluggish earnings outlook?

Want more market analysis from this author? Make sure to follow @Ryan_McQueeney on Twitter!

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