At the start of the earnings season, many investors look for the rare gems and the most promising sectors in the stock market according to their investment strategy and investment horizon.
ActivTrades has been looking into the semiconductor sector with TSMC. Is It a Good Time to Buy TSMC Stock? What are the growth drivers and challenges for the company? Let’s find out more with our presentation and opinion on TSMC.
Who is TSMC?
TSMC (Taiwan Semiconductor Manufacturing Company) is a Taiwan-based semiconductor manufacturer. The foundry is considered one of the most important manufacturers of semiconductors worldwide, as it is the largest foundry with a market share of over 50%.
The Taiwanese group is a key supplier for many high-tech companies that offer mobile phones, computers, electric vehicles, devices related to the Internet of Things (IoT) or even 5G technologies based on artificial intelligence, among others.
In addition to memory chips, graphics processing and computer chips, communications chips, memory chips, sensor chips and IoT chips, TSMC also provides services such as integrated circuit design and test services.
Some of TSMC’s most popular customers include Apple, Huawei, AMD, MediaTek, Qualcomm, and NVIDIA.
How is the semiconductor industry doing?
The semiconductor sector has seen significant growth in recent years due to the growth of the technology used in many products and industries such as smartphones, laptops, networking and other technologies that we have mentioned.
During the pandemic, there has been strong demand for chips used in mobile devices and laptops, but this has been offset by a drop in demand for chips used in desktops and servers due to the end of the COVID-19 lockdowns and the ensuing balanced by economic pressures.
Added to this are chip shortages and delivery delays due to high demand, but also the disruption to supply chains caused by the pandemic. This has resulted in higher costs for businesses and supply chain disruptions for consumers.
There have also been trade tensions between the United States and China, which have impacted the relationship between semiconductor companies and their key customers, leading to some uncertainty about the future of some players in the industry.
The semiconductor sector benefits from certain growth drivers such as the increasing use of electronic devices in the world, the increasingly important integration of artificial intelligence technologies or the development of electric and self-driving cars.
Despite everything, other aspects seem to weigh on growth prospects, such as fears of a major global recession, expectations of a drop in sales of computers and smartphones this year, and the technological war between China and the United States over semiconductors.
According to the latest forecast from consulting firm Gartner, global semiconductor sales are expected to decline 3.6% in 2023, after growing 4% in 2022 to $618 billion.
Why invest in TSMC stocks?
TSMC: a leading position in the semiconductor industry
TSMC is considered one of the largest semiconductor manufacturers in the world with a large market share in the production of chips for high-tech companies. This market-leading position allows the company to benefit from industry growth trends and generate stable revenue while having attractive growth prospects.
Strong financial position and significant growth potential for TSMC
TSMC has strong equity and has experienced consistent earnings growth over the years, indicating the company’s financial health and ability to generate recurring revenue.
In its latest earnings release, the company published positive and encouraging numbers. Year-over-year, fourth-quarter revenue rose 42.8%, while net income and diluted earnings per share each rose 78%. Compared to the third quarter of 2022, fourth-quarter results improved with revenue up 2% and net income up 5.4%.
TSMC also invests heavily in R&D to remain competitive and develop new technologies that may lead to future growth opportunities for the company.
In addition, the company decided to build two semiconductor fabs in Phoenix, Arizona to relocate its production and make that location the “greenest semiconductor fab in the United States, producing the technology of the most advanced semiconductor processing in the country.”
Low valuation of TSMC stock compared to its fundamentals
Due to TSMC’s economies of scale and high prices justified by its advanced process technology, the company is expected to consistently achieve higher gross margins than its peers. Gross margin has also improved from 51.6% to 59.6% between 2021 and 2022. TSMC’s stock price is still a long way from its recent highs and its valuation is lower than the majority of its peers
Warren Buffett bought 4.1 billion shares of TSMC
Many private and professional investors are following the changes in the composition of the portfolio of the company of the famous American investor Warren Buffett, Berkshire Hathaway Inc.
In fact, in November 2022, the investment company bought 4.1 billion shares of TSCM. According to official documents, as of September 30, 2022, Berkshire Hathaway Inc held approximately 60.1 million shares of TSMC, which would make Buffett’s company TSCM the largest outside shareholder.
Though Berkshire Hathaway hasn’t invested heavily in emerging technologies in a while, the company tends to favor companies that it believes have a competitive advantage over others. This sign could encourage other investors to buy TSMC shares.
What are the risks of TSMC stock?
Political and geopolitical tensions with China
TSMC is based in Taiwan, which is a sovereign state but not recognized by China. Tensions between Taiwan and China have been rising in recent years, which could cause trade disruptions and uncertainty for companies like TSMC.
Chip shortages and supply chain disruptions
Chip shortages and supply chain disruptions are a growing concern recently due to the high demand for chips and the disruption in supply chains caused by the COVID-19 pandemic. This resulted in delivery delays and higher costs for TSMC. The restructuring of supply chains and the construction of new smelters could take time (several years for some analysts) and weigh on the company’s growth prospects.
Investment and Technology Risks
TSMC invests heavily in cutting-edge technologies to remain competitive, but this may lead to investment risks such as over-investment, unprofitable projects, etc.
TSMC’s heavy reliance on the smartphone market and high-performance computing
TSMC Group operates in a highly competitive and highly cyclical industry. In addition, the company records large expenditures in the smartphone market as it would derive more than 40% of its revenue from this market. High performance computing is also an important area for the company, which also generates around 40% of its sales from this segment.
Concentration Risk of TSMC Customer Portfolio
TSMC has customer concentration risk, which means that a significant portion of its revenue is generated from a small number of customers. The company’s largest customer, Apple, contributed nearly 26% of its revenue in 2021, and its top four customers around 40%.
So if one of its major customers experiences financial difficulties or decides to reduce its orders, it could have a significant impact on TSMC’s revenue and profitability. Not to mention that it also increases the company’s reliance on a few customers. This could therefore lead to a reduction in TSMC’s bargaining power and adversely affect its margins and profitability.
TSMC Stock: Technical Analysis
After gaining more than 88% in 2020, TSMC stock gained nearly 12% in 2021 (after climbing nearly 30% in the first two months of 2021) before plummeting in mid-January 2022 hit a new high above $144 and then plummeted 50% ending 2022 around $72 (with a year low of $59.54, then flirting with mid-2020 levels).
Graphic analysis of TSMC stock stock price
Stock exchange cafe
Source: ActivTrades online platform ActivTrader
TSMC’s stock price has recovered more than 45% since its low in late October early November 2022 when TSMC stock was trading at around $60. Today it is trading above $86.30.
While the RSI indicator has entered overbought territory with the recent bullish move in TSMC stock, prices are likely to continue higher as they are above the Ichimoku cloud and above the indicator lines. Also, the MACD is positive.
Also read our file Graphic and technical analysis: how to use it in the stock market?
Our take on TSMC stock on the stock market?
Despite the recent downturn in the semiconductor industry, TSMC had a prosperous 2022, posting significant growth to reach 75.88 billion New Taiwan Dollars in 2022 (an increase of 33.5% from 2021).
Over time, ActivTrades believes it is certain that the demand for chips will increase significantly, especially thanks to megatrends such as digitization, Internet of Things, autonomous driving, cloud computing, mixed reality, etc. .
TSMC is well positioned to capitalize on overall market growth given its leadership position as the largest foundry and the Company’s dominance in increasingly sophisticated manufacturing processes. Additionally, its low valuation among its peers makes it a good choice for a long-term investment as this founder appears undervalued.
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