Taiwan Semiconductor: Strong Growth From This Top AI Beneficiary
Contributor since 2014 / 51145 Followers
Summary:
- Taiwan Semiconductor Manufacturing Company reported exceptional sales growth, with a 39% year-over-year increase in September revenues, positioning it as a top AI beneficiary.
- Analysts expect TSMC to report Q3 earnings per share of $1.79, with stable margins despite potential additional costs from AI chip investments.
- TSMC’s forward earnings multiple is attractive, trading at 28x for 2024 and substantially lower for 2025.
- Geopolitical risks exist due to TSMC’s Taiwan-based fabs, but its dominant market position and growth prospects in AI and cloud computing remain strong.
shih-wei
Article Thesis
Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) is a top semiconductor company that has just reported excellent sales results. The company will report its earnings results next week, which is why we will take a look at what investors can expect. Thanks to its leadership position in chip manufacturing, Taiwan Semiconductor Manufacturing Company remains a top AI beneficiary that profits from the growth shown by NVIDIA (NVDA) and others.
Past Coverage
I have written about Taiwan Semiconductor Manufacturing Company Limited here on Seeking Alpha, most recently in March 2023. I gave the company a Buy rating back then, noting its undemanding valuation and great position as a leading foundry player. This has worked out well so far, with TSM delivering a total return of 118% over the last roughly 18 months since that article has been published.
With the AI chip space showing massive growth since then, and with TSM reporting its next earnings results soon, it is time for an update on this chip giant.
What Happened?
Taiwan Semiconductor Manufacturing Company announced its September sales results this week, once again providing excellent numbers. Seeking Alpha reports that revenues were up by a massive 39% compared to the previous year’s month, rising to NT$252 (New Taiwan Dollar) billion, which equates to roughly US$8 billion, which isn’t far from a US$100 billion annualized sales pace.
For the third quarter, which also includes July and August, Taiwan Semiconductor Manufacturing Company’s revenue totaled NT$760 billion, or US$23.6 billion. This number was not only strong in absolute terms, but the company also once again beat its own guidance: TSM had guided for US$22.4 billion to US$23.2 billion, with a midpoint of US$22.8 billion, but actual results outpaced the top end of the guidance page and beat the guidance midpoint by 4%.
Taiwan Semiconductor Manufacturing Company: Earnings Outlook
Taiwan Semiconductor Manufacturing Company will report its earnings results next Thursday.
We already know what the reported revenue results will look like, but we don’t know yet about three other important things: TSM’s earnings, its cash flows, and its outlook or guidance for the current quarter, Q4.
Starting with the company’s earnings, Wall Street analysts are currently predicting that Taiwan Semiconductor Manufacturing Company will report earnings per share of around $1.79 for the third quarter. This would represent growth of around 39% compared to the previous year’s quarter, while revenues have grown at a high-30s pace as well. Analysts thus expect that earnings growth and revenue growth will be more or less in line, indicating stable margins.
On one hand, Taiwan Semiconductor Manufacturing Company’s growing revenues and volumes could have resulted in operating leverage and corresponding margin increases, due to factors such as administrative costs growing less than revenues and gross profits.
But on the other hand, it is also possible that Taiwan Semiconductor Manufacturing Company’s investments in new capacity, especially for AI chips, have resulted in additional costs. Analysts seem to believe that these two factors will offset each other, but history indicates that the analyst community could be underestimating Taiwan Semiconductor Manufacturing Company once more. After all, the company has beaten earnings per share estimates for a hefty 20 quarters in a row, which makes for one of the best earnings beat records I have ever seen. There is, of course, no guarantee that the company will outperform expectations once again, but the very reliable earnings beats in the past indicate that there is a very solid chance that TSM will report better-than-expected profits once more, with operating leverage thanks to the company’s nice revenue growth being a likely explanation if TSM does indeed beat earnings estimates again.
When it comes to cash flow generation, Taiwan Semiconductor Manufacturing will likely report strong operating cash flows once again, with a number of more than US$10 billion seeming likely based on recent results. Due to ongoing substantial investments in new capacity — necessary to fuel the company’s huge business growth — capital expenditures will be sizeable as well, however, which is why free cash flows won’t be as high as TSM’s operating cash flows. That being said, free cash flows could still be in the US$5 billion range, which is quite nice for a single quarter.
When it comes to Taiwan Semiconductor Manufacturing Company’s guidance for the current quarter, Q4, I believe that management will give out positive guidance. Taiwan Semiconductor Manufacturing Company is benefitting from the ongoing AI growth train, as a key manufacturer for companies such as NVIDIA and AMD (AMD), and that should be reflected in the results for the current quarter as well. Analysts are forecasting that Q4 revenues will be up around 25% compared to the fourth quarter of 2023, which seems achievable for sure. Based on the fact that TSM has been conservative with its guidance in the past — which is why the company has beaten its own guidance easily in Q3 — I would not be surprised to see another somewhat conservative guidance number that will allow the company to outperform its guidance later on. Generally, I believe that this is more favorable than the contrary — overpromising and then failing to deliver.
Valuation
Taiwan Semiconductor Manufacturing Company trades for 28x forward net profits, based on current earnings per share estimates for this year. When we consider the company’s very clear record of beating Wall Street’s earnings per share estimates, it would not be surprising at all to see the company report higher full-year earnings per share compared to what is currently predicted, which means that the “actual” forward earnings multiple might be closer to 27. That still does not make for an especially low valuation in absolute terms, but we have to consider the company’s growth, its excellent market position, and macro tailwinds when evaluating TSM’s valuation.
Since fiscal 2024 will end in less than three weeks, we can also take a forward look at fiscal 2025. Based on current estimates for next year, Taiwan Semiconductor Manufacturing Company is trading for 22x net profits. When we once again account for the analyst community’s clear tendency to underestimate TSM, which makes it likely that actual profits for next year will be higher than expected, the “true” earnings multiple for next year could be even lower than 22.
Either way, a low-20s earnings multiple for next year seems far from high, I believe. After all, Taiwan Semiconductor Manufacturing Company combines many positives, including excellent growth deep in the double-digits and a fortress market position. In the foundry space, no other company comes close to Taiwan Semiconductor Manufacturing Company, giving TSM dominance over its competitors and a great negotiating position versus both its suppliers and its customers — chip companies that want the best chips have little chance to avoid the best foundry, after all. With the self-inflicted problems and cash flow issues of new foundry entrant Intel (INTC), which is scaling back on its growth plans, TSM’s position got even stronger, I would say.
Risks And Takeover
No company is riskless, and that naturally also holds true for TSM. Execution risks seem pretty low, as TSM’s execution has been excellent in the past. Competitive threats also seem negligible, due to TSM’s dominant market position and the issues for competitor Intel.
Geopolitical risks exist, however, as many of Taiwan Semiconductor Manufacturing Company’s chip fabs are in Taiwan. If tensions between Taiwan and China were to escalate, Taiwan Semiconductor Manufacturing could be heavily affected. For those who worry about geopolitics and China-related macro risks, Taiwan Semiconductor Manufacturing may thus not be suitable.
That being said, many Western companies would be heavily impacted in a potential Taiwan-China conflict as well, including TSM’s customers and companies that sell products in China — Apple (AAPL), Tesla (TSLA), and luxury retailers such as LVMH (OTCPK:LVMUY) come to mind.
While I believe that geopolitical risks should not be neglected, I do not see these risks as overly large, which is why I am long TSM and very happy with my investment. I expect ongoing growth for TSM’s profits on the back of major trends such as AI, autonomous driving, cloud computing, and so on, which should result in both a rising share price and a rising dividend over the years.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of TSM either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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