The demand for semiconductors has skyrocketed in a world that continues to rely on technology for everything from communication to healthcare. However, despite solid secular tailwinds behind chip manufacturing, the industry is no stranger to cyclical downturns, and many companies have struggled to navigate the ebbs and flows of the volatile chip market.
Even Taiwan Semiconductor (NYSE: TSM), one of the industry's leading players, has been hit hard by the recent downturn. But there are signs that the company is poised to bounce back quickly. Despite its struggles over the last year and a half, today is an excellent time for long-term growth investors to consider putting it on their buy list. Here's why.
Revenue growth driven by AI and mobile phones
As society's thirst for the latest technology increases, the need for faster and more efficient computing is rising. And that's where Taiwan Semiconductor (TSMC) comes in as the largest contract chip manufacturer in the world. TSMC is a pure-play foundry, meaning it doesn't design or sell chips to end users but specializes in manufacturing them for other companies. And with cutting-edge technology at its disposal, it can meet the ever-growing demand for more powerful semiconductors.-
One area that the company's management is particularly excited about is the proliferation of artificial intelligence (AI) technology, including generative AI. As AI requires massive computing power, TSMC's expertise in this area means it is well positioned to increase AI-related revenue in the coming years. Overall, the proliferation of AI is a significant tailwind for TSMC, making the company an excellent long-term investment for investors seeking exposure to the growth of AI.
Here is what the company's CEO, C.C. Wei, has to say about AI:
Today, server AI processor demand, which we define as CPUs, GPUs, and AI accelerators that are performing training and inference functions, accounts for approximately 6% of TSMC's total revenue. We forecasted this to grow at close to 50% CAGR [compound annual growth rate] in the next 5 years and increase to low teens percent of our revenue. The insatiable need for energy-efficient computation is starting from data centers and we expect it will proliferate to edge and end devices over time, which will further long term -- which will drive further long-term opportunities.
Another significant growth engine for the company is mobile phones. TSMC is a major supplier of chips for the mobile phone industry, and as the mobile phone market returns to growth, it should benefit. Research company International Data Corporation (IDC) projects that global shipments of smartphones will rebound from a 3.2% decline in 2023 to 6% growth in 2024. If IDC is correct, it bodes well for TSMC's results to recover next year.
Don't look for a great performance in the short term
High-performance computing (HPC) and mobile phones make up 77% of TSMC's revenue. As seen in the image below, HPC declined by 5% and smartphones dropped by 9% sequentially.
Its HPC and mobile phone platform declined because of a mismatch between semiconductor supply and demand. In 2020 and 2021, there was a sharp increase in demand for HPC and mobile phone chips due to the COVID-19 pandemic, leading device manufacturers to build up inventory in anticipation of continued high demand. However, chip demand slowed in 2022 as the pandemic eased and consumers spent more time outside and less time on their phones and the internet.
Unfortunately, things only worsened as rising interest rates slowed global growth coming into 2023. Manufacturers like Apple suddenly faced difficulties selling their products. Consequently, they reduced manufacturing and ended up with surplus semiconductor components in their inventory, leading them to buy fewer chips from TSMC. The following chart shows that its revenue growth, profitability, and free fell off a cliff in 2023.
Don't expect things to get much better soon. Management forecast third-quarter revenue of between $16.7 billion and $17.5 billion, a year-over-year decline of 15.5%. It also expects the gross profit margin to drop to between 51.5% and 53.5%, and the operating profit margin to decline to between 38% and 40%. Until chip supply and demand rebalance, don't expect TSMC's results to improve much.
Now is the time to consider buying TSMC
As a result of the spate of negative news in the semiconductor industry, the company now sells at a price-to-earnings (P/E) ratio of 15.18 compared to its median P/E ratio of 21.48 over the last five years -- which many would consider a sign of an undervalued stock.If you are searching for a solid long-term growth opportunity that sells for a reasonable price, consider adding a few shares of TSMC to your portfolio today.
10 stocks we like better than Taiwan Semiconductor Manufacturing
In today's rapidly evolving technology environment, investing in semiconductor companies has become a top priority for savvy investors looking for growth and stability. Among the many players in the sector, Taiwan Semiconductor Manufacturing Company (TSMC) stands out as a formidable force. In this article, we'll delve into the reasons why Taiwan Semiconductor is a top-tier stock for investors to consider, leveraging its robust performance, cutting-edge technology, and solid market position.
TSMC's strong financial performance
Investors are always looking for companies that show consistent financial growth, and TSMC definitely fits the bill. With a history of strong quarterly results and steady revenue growth, TSMC has demonstrated its ability to withstand market fluctuations and economic challenges. Its financial stability provides investors with a sense of security and confidence in the company's long-term prospects.
Leadership in advanced semiconductor technology
TSMC's commitment to pushing the boundaries of semiconductor technology puts it ahead of its competitors. The company's dedication to research and development has led to breakthrough innovations in chip manufacturing processes that result in more powerful, energy efficient and compact electronic devices. This leadership in advanced semiconductor technology gives TSMC a competitive advantage and ensures its relevance in an industry that thrives on innovation.
Strategic partnerships and client base
TSMC's extensive network of partnerships with leading technology giants cements its position as a key player in the semiconductor market. Collaborations with companies such as Apple, NVIDIA and Qualcomm highlight TSMC's critical role in the production of high-end consumer electronics, high-performance computing and 5G technologies. This diverse client base provides TSMC with a diversified revenue stream and reduces dependence on any single market segment.
Growing demand for semiconductors
Global demand for semiconductors shows no signs of slowing down. As industries such as artificial intelligence, automotive, and the Internet of Things continue to expand, the need for advanced semiconductor solutions will only increase. TSMC is well positioned to take advantage of this growing demand and ensure consistent business flow and potential for revenue growth.
Resilience amid supply chain disruption
Recent global supply chain disruptions have highlighted the importance of resilient and adaptable companies. TSMC's well-established supply chain and manufacturing management capabilities have enabled it to manage challenges such as ongoing semiconductor shortages more effectively than many of its competitors. This adaptability demonstrates TSMC's commitment to maintaining a stable supply of semiconductors, a critical factor for both customers and investors.
In the ever-evolving world of technology investment, Taiwan Semiconductor Manufacturing Company (TSMC) shines as a top choice for investors. Strong financial performance, leadership in advanced semiconductor technology, strategic partnerships and resilience to supply chain disruption make it a compelling investment opportunity. As demand for high-performance semiconductors continues to grow, TSMC's market position and innovation-driven approach make it a company worth considering for investors seeking long-term growth and stability.
The information provided in this article is for informational purposes only and should not be considered investment advice. Always do thorough research and consult with financial professionals before making any investment decision.
.jpg)
0 Comments