Despite Taiwan Semiconductor Manufacturing Co. (TSM, Financial) reaching unprecedented highs, its valuation remains modest, suggesting its forthcoming financial results could further elevate its stock price.
Market analysts speculate that the leading semiconductor manufacturer might uplift its revenue and capital expenditure projections for the year, following its impressive sales performance in the recent quarter. This adjustment would underscore the sustained growth driven by the artificial intelligence sector.
As the principal producer of chips for companies like Nvidia Corp. (NVDA, Financial), TSMC is at the forefront of the AI revolution. Although the demand for smartphones and other consumer electronics is uncertain, the industry's shift towards more sophisticated circuitry is seen as a positive sign.
Xin-Yao Ng, an investment director, pointed out that capital expenditure expectations are crucial as they reflect the demand TSMC is experiencing. The company's leading position and technological advancements in advanced chip manufacturing make it an attractive investment, with the potential for long-term earnings growth.
Since October 2022, TSMC's shares have doubled, adding $330 billion to its market value, making it Asia's largest stock. However, it trades just below its five-year median valuation at 16 times expected earnings for the next year, in contrast to the Philadelphia Semiconductor Index's 28 times.
The chip giant is set to disclose full first-quarter results soon, which will provide insights into its business segments' sales and profitability amidst its international expansion efforts. Analysts predict that TSMC's gross profit margin will remain steady at 53%.
With a capital expenditure budget of $28 billion to $32 billion for the year and an anticipated revenue growth of at least 20%, TSMC aims to reverse the slight decline experienced in 2023. The consensus among analysts is a $29 billion capex.
TSMC is expanding its manufacturing footprint in the US, Japan, and Germany to meet global demand and mitigate geopolitical risks. This move is partially in response to recent tensions between China and the West.
Analysts like Phelix Lee from Morningstar Inc. believe TSMC is undervalued, given its dominance in the advanced chip sector. The geopolitical concerns are somewhat alleviated by the $11.6 billion in grants and loans TSMC received for its Arizona factories under the US Chips Act.
The trading activity around TSMC's shares indicates a bullish outlook, with a decrease in the put-to-call ratio. The stock enjoys a strong buy recommendation from 34 analysts, with only one hold and no sell ratings.
Peter Garnry of Saxo Bank expects TSMC's demand and sales growth to outpace current market expectations. However, he notes the challenge of diversifying manufacturing out of Taiwan, which increases capital expenditure needs but is essential for meeting high demand.
