Taiwan Semiconductor (TSM) is a leading foundry that should benefit from ongoing chip demand growth.
Its shares are valued at a reasonable valuation that should allow for solid total returns over the coming years, although investors should keep an eye on potential risk factors, such as a brewing conflict between China and Taiwan.
Overall, I am bullish on Taiwan Semiconductor Manufacturing Company. (See Analysts’ Top Stocks on TipRanks)
Long-Term Tailwinds
Taiwan Semiconductor Manufacturing Company is a leading foundry, which means that the company manufactures semiconductors for other companies.
Nvidia (NASDAQ:NVDA), AMD (AMD), and many more do design semiconductors, but do not manufacture them themselves. Instead, they let TSM and other foundries produce the chips they sell.
Due to strong industry tailwinds for the semiconductor industry, the growth outlook for Taiwan Semiconductor's business is attractive -- our modern way of living requires more and more chips in everyday products such as smartphones, cars, smart appliances, etc.
Since many of the leading chip companies do not manufacture these chips themselves, Taiwan Semiconductor has been able to grow its revenue and profits reliably in the past.
The same should hold true for the coming years, at least if the analyst community is correct about Taiwan Semiconductor's growth outlook. Right now, analysts are predicting that revenue will climb from $56.4 billion this year to $93 billion in 2024.
Likewise, analysts are predicting that the company will be able to grow its earnings per share by 20% next year, to $4.80, and by another 24% during the following year, as the consensus estimate for Taiwan Semiconductor's earnings per share stands at $5.94 for 2023.
Valuation Is Fine
Taiwan Semiconductor Manufacturing trades at 27.7x this year's expected net profit, which is not a very low valuation.
Based on forward earnings estimates for 2022, however, shares do already look significantly less expensive, as they are being valued at 23.1x 2022's net profits.
When we consider that the company is forecasted to grow at a mid-teens pace over the coming years, that doesn't seem too expensive.
Taiwan Semiconductor's healthy margins and sizeable moat, as well as industry tailwinds that should help the company in maintaining sizeable growth for many years, do also warrant a premium valuation relative to the average stock.
It should, however, be noted that Taiwan Semiconductor is exposed to the geopolitical situation between China and Taiwan. In recent days, news items suggested that tensions have risen again, which might indicate trouble for Taiwan Semiconductor in the future.
Wall Street's Take
Turning to Wall Street, Taiwan Semiconductor Manufacturing Company has a Moderate Buy consensus rating, based on one Buy assigned in the past three months.
At $138, the average Taiwan Semiconductor price target implies 24.5% upside potential.
Disclosure: At the time of publication, Jonathan Weber did have a long position in Taiwan Semiconductor Manufacturing Company.
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