Taiwan Semiconductor Manufacturing Co. Ltd. (TSM, Financial) remains at the forefront of the semiconductor industry, providing silicon wafers that power everything from smartphones and cars to data centers and artificial intelligence algorithms.
In a volatile market marked by fluctuations in both demand and revenue, the company continues to invest in cutting-edge technologies, focusing on sustainable growth and long-term value for shareholders.
A closer look at margins and revenue
Despite facing a 5.5% sequential revenue decline in the second quarter, Taiwan Semiconductor Manufacturing remains resilient. The decline was mainly attributed to global economic conditions and fluctuations in demand across various sectors. While sectors like high-performance computing declined by 5% and smartphone revenue dipped by 9%, the company's automotive and data center enterprise sectors showed signs of growth, rising by 3% and 25% respectively.
The company is cautious yet strategic in its capital allocation, with its 2023 capital budget falling toward the lower end of the $32 billion to $36 billion range. A shareholder-friendly approach is evident as Taiwan Semiconductor has increased its cash dividend per share from 2.75 New Taiwan dollars (8 cents) to NT$3 for the first quarter, further cementing its commitment to shareholders even in challenging times.
Gross margins and profitability challenges
Taiwan Semiconductor Manufacturing's gross margin faces several challenges, including increased capacity utilization costs, the ramp-up of its 3 nanometer technology and rising inflationary expenses such as utility costs.
While these headwinds are expected to lead to a short-term decline in gross margins, the company has proposed strategies to mitigate these challenges. Internal cost efficiencies, value-based sales and a focus on high-margin product segments are avenues the company is exploring to maintain a robust margin profile.
Future of chip technologies
One of the most exciting aspects of Taiwan Semiconductor’s business strategy is its focus on technological innovation. The company aims to be a major player in the AI, HPC and 5G sectors, which are expected to be key growth drivers in the semiconductor industry for the foreseeable future. The company's 3 nanometer technology, a cornerstone of its innovation strategy, is already in volume production and is expected to ramp up robustly in the latter part of 2023.
Additionally, the company is more than just content with immediate-term technologies; its N2 technology is already on the horizon, with production projected for 2025. This emphasizes Taiwan Semiconductor Manufacturing’s long-term commitment to staying ahead of the curve in semiconductor technology.
Global expansion: Navigating opportunities and risks
Taiwan Semiconductor Manufacturing has been making calculated moves to expand its global footprint. Its Arizona fabrication plant is part of its broader strategy to cater to U.S. semiconductor infrastructure demands. Similar efforts are underway in Europe, specifically Germany, and Japan.
These overseas initiatives are, however, challenging. Workforce shortages, particularly in Arizona, have led to delays, but the company remains committed to overcoming these obstacles by deploying trainers from Taiwan to upskill local workforces.
A critical risk factor lies in the geopolitical sphere, particularly the tension between Taiwan and China. The consequences of any geopolitical conflict could be far-reaching, not just for Taiwan Semiconductor Manufacturing, but for the global semiconductor supply chain. Therefore, while the company’s long-term outlook appears promising, this geopolitical risk is something potential investors must consider.
Synergies with partners
One often overlooked aspect of Taiwan Semiconductor's business model is its deep-rooted partnerships with tech giants like Nvidia Corp (NVDA, Financial). Following Nvidia's robust second-quarter performance, Taiwan Semiconductor is poised to benefit considerably. Estimates suggest Nvidia accounts for about 10% of Taiwan Semiconductor's overall revenue. As Nvidia grows, this partnership could offer lucrative margins for Taiwan Semiconductor, further bolstering its financial stability.
A $4.3 billion move signaling industry optimism and the future of advanced chipmaking
Intel Corp. (INTC, Financial) has agreed to sell a 10% stake in its IMS Nanofabrication business to Taiwan Semiconductor Manufacturing, valuing IMS at approximately $4.3 billion. The deal is expected to close in the fourth quarter of this year, with Intel retaining majority ownership and IMS continuing to operate as a standalone subsidiary. This investment follows Intel's prior sale of a 20% stake in IMS to Bain Capital.
IMS Nanofabrication specializes in creating multi-beam mask writing tools vital for extreme ultraviolet lithography —a crucial technology for the advanced chips used in AI and smartphones. Taiwan Semiconductor's investment is expected to speed up growth in the next phase of lithography technology, particularly as the industry shifts to high-numerical aperture EUV systems.
Even though Intel is building its contract manufacturing arm, Intel Foundry Services, to compete with Taiwan Semiconductor, this investment signifies the industry's enthusiasm for the opportunities that lie ahead for IMS in semiconductor manufacturing. The company's stake in IMS is especially notable given its reliance on IMS technology for several years and its long-standing partnership since around 2011 or 2012.
Valuation
Taiwan Semiconductor's current price of $85.52 is significantly lower than its intrinsic value of $133.98, indicating the stock may be undervalued. This offers an attractive entry point for long-term investors, especially considering its robust technological portfolio and growth prospects in AI, HPC and 5G technologies.
Lastly, even though its price-earnings ratio of 14.17 aligns with its five and 10-year averages, its price-sales ratio 6.06 is higher than the five-year and 10-year averages, suggesting the stock may be overvalued based on its sales.
Conclusion
Taiwan Semiconductor is uniquely positioned to leverage its technological innovations and strategic expansions to create a sustainable path forward, even as it navigates short-term challenges. The company's focus on research and development, prudent capital management and strategic international expansion make it a compelling consideration for long-term investment.
With unparalleled semiconductor manufacturing expertise and a vision encompassing the industry's most promising frontiers, Taiwan Semiconductor Manufacturing stands as a linchpin in a world increasingly dependent on advanced technology.
