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Buy This Tech Stock Down 30% for Long-Term Chip and AI Growth?

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Taiwan Semiconductor Manufacturing Co. ((TSM - Free Report) ) or TSMC is the largest chip manufacturer on the planet, with foundries that build the most cutting-edge semiconductors that drive technological advancements such as artificial intelligence and beyond.  

Taiwan Semiconductor stock has surged nearly 35% YTD, yet TSMC still trades roughly 30% below its peaks and 12% under its average Zacks price target heading into its Q2 FY23 earnings release on July 20.

The Basics

Taiwan Semi reportedly holds nearly 60% of the crucial chip foundry market. Chip companies around the world turn to foundries such as TSMC for production because the costs, time involved, and know-how to actually make the chips are simply enormous—and becoming more costly and complex by the day.

Taiwan Semi is currently the dominant player in the space and it continues to benefit from its founding idea of focusing only on manufacturing. TSMC is one of the only pure-play chip manufacturers on the market since some of its competitors design and build their own chips. For example, Taiwan Semi is the only company listed in the Zacks Semiconductor - Circuit Foundry industry.

Zacks Investment Research
Image Source: Zacks Investment Research

Taiwan Semi boasts clients such as Nvidia ((NVDA - Free Report) ), Apple ((AAPL - Free Report) ), and many other tech titans. Taiwan Semi is a leader in the 5nm space and actively rolling out next-generation 3nm chips. Taiwan Semi is already seeing increased demand for AI-focused chips and other areas of the economy that require the smallest, fastest chips possible such as smartphones and beyond.

TSMC is actively expanding outside of Taiwan amid tensions between the U.S. and China. Taiwan Semi is currently building a semiconductor fabrication plant in Arizona, spurred by incentives from the U.S. government.

Other Fundamentals

TSMC averaged roughly 18% revenue growth in the five-year period between FY18 and FY22, including 29% expansion in 2022. But Taiwan Semi faces near-term headwinds in the traditionally cyclical chip market. Zacks estimates call for TSMC’s adjusted EPS to slip 19% in FY23 on 6% lower sales. This year is projected to mark the company’s first YoY revenue decline since 2009.

But in the forward-looking world of Wall Street, investors should care more about the fact that TSMC is expected to bounce back in FY24. Zacks estimates call for the Taiwan Semi to post 18% adjusted earnings growth to get within touching distance of its record 2022 profits. The company is also projected to report 15% revenue expansion in FY24 to help it easily post a new all-time high of $82.01 billion.

Zacks Investment Research
Image Source: Zacks Investment Research

TSMC’s earnings revisions have held up recently to help it land a Zacks Rank #3 (Hold). And its most recent FY24 EPS estimate came in 5% above the current consensus.

TSM stock has soared 950% in the last 15 years vs. the Zacks Tech sector’s 333%, which includes a 62% run over the past three years compared to tech’s 37%. Yet, TSMC is down 16% in the last 24 months to trade around 30% below its all-time highs.

TSMC found support near its 50-week moving average in May. The nearby chart showcases its strong pop off its 200-day in April to help it trade solidly above both its 50-day and its 200-day. Taiwan Semi stock also completed the bullish golden cross, where the shorter-term moving average climbs back above the longer-dated trendline, earlier this year.

On the valuation front, TSMC trades at a 48% discount to its own highs and 30% below the Zacks Tech sector at 17.4X forward earnings. Taiwan Semi stock also trades at only a 12% premium to its own 10-year median despite soaring 440% during the time period.

TSMC pays a dividend that yields 1.4% at the moment. And four out of the six brokerage recommendations that Zacks has for Taiwan Semi are “Strong Buys,” alongside one “Buy,” and one “Hold.” Plus, it boasts a very sturdy balance sheet.

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Image Source: Zacks Investment Research

Bottom Line

Taiwan Semi is not in an ideal situation politically, with the U.S. and China fighting for control over semiconductor production. This factor alone might keep many investors away.

But it is worth remembering that TSMC builds the chips that fuel tech innovation and likely will for decades to come despite geopolitical worries given its sheer size and cutting-edge capabilities. And some might want to consider TSMC as a way to gain exposure to AI alongside Nvidia and others.

[Disclosure: Ben Rains owns TSMC shares in his own personal portfolio.]

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