Taiwan semiconductor (TSMC) (NYSE:TSM) jumped 6% two days after the company announced its fourth quarter results. As the largest semiconductor foundry in the world, it has become one of the largest and most influential companies in the world.
However, it has reached a market capitalization of $730 billion, which worries some investors because massive size can slow growth rates. Will it remain a compelling investment as the chip shortage eases?
The state of TSMC
TSMC continues to dominate the foundry space. It accounted for 53% of the entire foundry market in Q3 2021, according to TrendForce. Additionally, it serves fabless chip companies such as AMD (NASDAQ:AMD), Nvidia (NASDAQ: NVDA), Qualcomm (NASDAQ: QCOM), and Apple (NASDAQ:AAPL). Most of the industry depends heavily on TSMC. Due to its technological lead over Samsung and other peers, TSMC is probably the most essential company in the semiconductor industry and arguably the world’s most essential company in any industry.
In addition to its market power, it also continues to benefit from an ongoing chip shortage and its spending plans are mind-boggling. To that end, it announced in April that it would invest $100 billion in new smelters over the next three years. Additionally, in the latest report, TSMC announced that it plans to spend between $40 billion and $44 billion in 2022 alone to ramp up production as artificial intelligence (AI), virtual reality (VR), internet objects (IoT) and other emerging industries. require more tokens.
As long as the chip shortage persists, the extra capacity should add to the top and bottom results. Still, if supply were to catch up with demand, it could potentially reduce TSMC’s pricing power, reducing or possibly reversing the company’s revenue growth.
Nevertheless, Intel (NASDAQ: INTC), which is also a TSMC customer, has entered the foundry business and taken similar steps to add capacity. Also, peers such as CMU and GlobalFoundries have made expansion plans. This could hurt profitability later on as chip supply catches up with demand.
Intel claims it can catch up to TSMC by 2024 and regain the technical lead in 2025. Longtime industry analysts may recall that Intel lost its technical leadership in the early 2010s when the Development cycles have extended beyond two years. Additionally, AMD has taken a technical lead in some areas after many investors left it for dead as recently as 2015. TSMC shareholders shouldn’t rule out the possibility of Intel or another peer making such a move. return.
Taiwan Semiconductor recorded revenue of $57 billion in 2021. This represents a 19% increase over 2020 and led to a net profit of $21 billion, 15% higher than the year last. Although the cost of revenue and operations grew at a slower rate than revenue, non-operating income fell 27% during the year to $470 million, which reduces earnings growth.
Additionally, analysts forecast consensus revenue in 2022 of $75 billion, an increase of 31%. Thanks mostly to the post-earnings rally, TSMC stock is up just over 7% in the past year.
Additionally, TSMC shares are currently trading at 36 times earnings. This is significantly lower than its main customers. AMD is selling for a price-to-earnings (P/E) ratio of 42 while Nvidia is at 83 times earnings. Nonetheless, Qualcomm is selling for 24 times earnings and customer-competitor Intel is trading at a P/E of 11, indicating a moderate valuation for the company.
Is it too late to consider TSMC?
TSMC continues to dominate and lead its industry. Certainly, with TSMC and its peers adding capacity, the chip shortage may ease for the foreseeable future, which could eventually reduce the company’s revenue. Additionally, the emerging threat from Intel could also indicate competitive challenges down the road.
However, Intel remains technically far behind TSMC and has yet to prove that it can catch up. With a moderate valuation and substantial earnings growth expected to continue despite its size, investors can likely still beat the market with this chip stock.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.