Taiwan Semiconductor (TSM) Good Growth and Undervalue (Q3 2024 Earnings)

Taiwan Semiconductor Manufacturing Company (TSMC, NYSE:TSM) is a cornerstone of the global technology industry, renowned for its leadership in the production of advanced semiconductors. As the backbone of innovations in artificial intelligence, high-performance computing, and consumer electronics, TSMC’s role in the supply chain is indispensable. Despite the competitive and cyclical nature of the semiconductor industry, TSMC has showcased strong financial growth and resilience, with substantial revenue increases and improvements in operational metrics. Additionally, its stock has outperformed market benchmarks, highlighting investor confidence in its growth potential. This blog delves into TSMC’s impressive financial performance, valuation, growth prospects, and associated risks, offering a comprehensive perspective on why it remains a compelling investment opportunity.

About Taiwan Semiconductor

Taiwan Semiconductor Manufacturing Company (TSMC) is a globally renowned leader in the semiconductor industry. Founded in 1987 by Morris Chang and headquartered in Hsinchu, Taiwan, TSMC pioneered the concept of a dedicated semiconductor foundry, focusing exclusively on manufacturing chips for its clients rather than producing its own branded products. This innovative business model has allowed TSMC to collaborate with a diverse range of customers, including technology giants like Apple, AMD, Nvidia, and Qualcomm.

The company specializes in the design and production of integrated circuits and semiconductor devices using advanced process technologies. As the largest contract chip manufacturer globally, TSMC plays a critical role in the supply chain for industries spanning smartphones, high-performance computing, automotive, and the Internet of Things (IoT). It is renowned for its cutting-edge manufacturing processes, including leading-edge nodes like 3nm and 5nm, which provide enhanced performance and energy efficiency. TSMC’s commitment to technological innovation and its ability to meet the ever-evolving needs of its customers have cemented its position as an indispensable player in the global tech ecosystem.

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TSMC Financial Performance

In the third quarter of 2024, TSMC reported robust financial performance, reflecting its strong market position and operational efficiency. The company achieved a revenue of NT$759.69 billion, marking a substantial increase of 38.95% compared to NT$546.73 billion in the same quarter of the previous year. This impressive revenue growth is largely attributed to the escalating demand for advanced semiconductors, particularly those utilized in artificial intelligence (AI) applications and high-performance computing. Earnings per share (EPS) for Q3 2024 stood at NT$12.54, a significant rise of 54.1% from NT$8.14 in Q3 2023, indicating enhanced profitability. On a trailing twelve months (TTM) basis, revenue reached NT$2.65 trillion, up 22.65% from NT$2.16 trillion in the prior year, while EPS increased by 15.83% to NT$40.01 from NT$34.54. Notably, free cash flow per share (TTM) experienced a remarkable surge of 284.46%, climbing to NT$32.26 from NT$8.39, underscoring TSMC's robust cash generation capabilities.

TSM Stock Price Performance and Valuation

Over the past year, TSMC's stock has demonstrated impressive performance, with the share price appreciating by 96.94%, significantly outperforming the S&P 500's increase of 27.52% during the same period. This substantial growth reflects investor confidence in TSMC's strategic direction and market prospects. Despite this surge, TSMC's valuation metrics suggest that the stock remains attractively priced. The price-to-sales (P/S) ratio on a TTM basis is 10.26, indicating a reasonable valuation relative to revenue. The price-to-earnings (P/E) ratio stands at 26.24, with a forward P/E of 19.33, suggesting expectations of continued earnings growth. Additionally, the price-to-free cash flow (P/FCF) ratio is 33.32, reflecting strong cash flow generation. These valuation ratios, in conjunction with TSMC's growth trajectory, suggest that the stock offers a compelling investment opportunity, balancing growth potential with reasonable valuation.

TSMC Growth Potential

TSMC's growth potential is underpinned by several factors that position the company for sustained expansion. The global semiconductor market is experiencing robust growth, driven by increasing demand for AI applications, the proliferation of Internet of Things (IoT) devices, and advancements in automotive technologies, including electric vehicles (EVs). TSMC's leadership in advanced process technologies, such as 3nm and 5nm nodes, enables it to meet the evolving needs of these high-growth sectors. Furthermore, the company's strategic investments in research and development, as well as capacity expansion, ensure its readiness to capitalize on emerging opportunities. Analysts project TSMC's adjusted earnings to grow by 25% in 2024 and 28% in 2025, with revenue growth expected at 24% for both years, underscoring the company's robust growth potential.

Risk to Consider

While TSMC presents a compelling investment case, it is essential to consider potential risks. The semiconductor industry is highly competitive, with rapid technological advancements necessitating continuous innovation. Geopolitical tensions, particularly between the U.S. and China, pose risks that could impact TSMC's operations and supply chain dynamics. Additionally, the cyclical nature of the semiconductor market may lead to periods of fluctuating demand. However, TSMC's strong market position, diversified customer base, and proactive risk management strategies mitigate these concerns, supporting a positive investment outlook.

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Conclusion

TSMC's impressive financial performance, attractive valuation, and significant growth potential make it a noteworthy consideration for investors seeking exposure to the semiconductor industry. The company's leadership in advanced manufacturing technologies, coupled with its strategic investments and robust demand across various sectors, positions it well for sustained growth. While mindful of inherent industry risks, TSMC's strengths and proactive strategies provide confidence in its continued success, making it a recommended addition to a diversified investment portfolio.