Hsinchu, Taiwan-based Taiwan Semiconductor Manufacturing Company Limited (TSM - Get Rating) is one of the biggest semiconductor manufacturers in the world, controlling 54% of global market share. With a $567.15 billion market cap, TSM is the ninth most valuable company in the world. Also, TSM is the most valuable publicly traded company in Asia. The company has strengthened its position in the global semiconductor industry with massive capital investments and accelerated sales amid the current chip shortage.

For its fiscal 2021 fourth quarter, ended December 31, 2021, TSM’s revenues increased 21.2% year-over-year to $15.74 billion. Its income from operations was $6.56 billion, up 16.3% from the same period last year. Its net income improved 16.5% from the prior-year quarter to $6.03 billion, surpassing the S&P Global Market Intelligence consensus estimate of $5.84 billion. And its earnings per ADR stood at $1.15, outperforming the Factset consensus estimate of $1.12.

TSM has surged 1.5% in price since its quarterly earnings report released on January 13 to close yesterday’s trading session at $133.83. In addition, the stock gained 11.2% year-to-date.

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Here is what could shape TSM’s performance in the near term:

Expansion Policies

Last November, TSM partnered with Sony Semiconductor Solutions Corporation to jointly develop Japan Advanced Semiconductor Manufacturing, Inc. in Kumamoto, Japan. The construction of the semiconductor foundry is expected to begin this year and is expected to be completed by 2024. This facility is expected to have a monthly production capacity of 45,000 12-inch wafers. TSM will have a more than 80% ownership stake in the foundry. Amid the ongoing global semiconductor shortage, this move is expected to boost TSM’s sales and profit margins.

Over the past two months, the company also launched high-performance computing chips and digital TV system-on-chip products, which have immense applications in the latest tech gadgets. In addition, TSM plans to invest $44 billion to expand its production capacity and global footprint in 2022. The company is poised to become the largest chip foundry business globally by 2030.

Stable Growth Story

TSM’s revenues have increased at a 14% CAGR over the past three years and 16.7% year-over-year. Its EBITDA and net income have risen at CAGRs of 15.2% and 17.6%, respectively, over the past three years. Its EPS has improved at a 17.6% CAGR over this period. In addition, the company’s trailing-12-month levered free cash flow improved 89.6% year-over-year, while its trailing-12-month total assets increased 16.4% from the same period last year. TSM’s trailing-12-month net income and EPS rose 16.7% and 16.6%, respectively, year-over-year.

Impressive Growth Prospects

Analysts expect TSM’s revenues to rise 32.9% in its fiscal 2022 first quarter (ending March 2022), 31.5% in the next quarter (ending June 2022), and 26.7% in fiscal 2022. The Street expects the company’s EPS to improve 33.4% in the current quarter, 42.7% in the next quarter, and 32.7% in the current year. In addition, TMS’ EPS is expected to rise at a 19.4% CAGR over the next five years. The company has an impressive earnings surprise history; it surpassed the consensus EPS estimates in each of the trailing four quarters.

POWR Ratings Reflect Rosy Prospects

TSM has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

TSM has an A grade for Momentum, Quality, and Sentiment. The stock is currently trading above its 50-day and 200-day moving averages of $122.22 and $117.92, respectively, indicating a golden cross uptrend, in sync with its Momentum grade. In addition, TSM’s trailing-12-month net income margin and ROE of 37.93% and 29.67%, respectively, are significantly higher than the 6.42% and 8.33% industry averages, justifying the Quality grade. Also, the bullish revenue and earnings growth outlook for TSM is in sync with the Sentiment grade.

Among the 100 stocks in the A-rated Semiconductor & Wireless Chip industry, TSM is ranked #37.

In addition to the grades I have highlighted, view TSM ratings for Stability, Growth, and Value here.

Bottom Line

The ongoing chip shortage and consequent rise in chip prices have paved the way for semiconductor companies to boost their production capacities to increase profit margins. TSM reported record profits in the last quarter, reflecting its leading position in the industry. The company expects its revenues to grow in the range of 15% – 20% per year over the next several years as it enters “a period of high structural growth,” as per Chief Executive C. C. Wei. Thus, we think TSM is an ideal investment bet now.

How Does Taiwan Semiconductor Manufacturing Company Limited (TSM) Stack Up Against its Peers?

While TSM has a B rating in our proprietary rating system, one might want to consider looking at its industry peers, Broadcom Inc. (AVGO - Get Rating), ChipMOS Technologies Inc. (IMOS - Get Rating), and Semtech Corporation (SMTC - Get Rating), which have an A (Strong Buy) rating.

Note that AVGO is one of the few stocks handpicked by our Chief Growth Strategist, Jaimini Desai, currently in the POWR Growth portfolio. Learn more here.

TSM shares were trading at $134.66 per share on Wednesday morning, up $0.83 (+0.62%). Year-to-date, TSM has gained 11.93%, versus a -3.55% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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