Warren Buffett’s Berkshire Hathaway Inc. (BRK.A, BRK.B) recently announced that it had purchased a $4.1 billion stake in Hsinchu City, Taiwan-based semiconductor chip giant Taiwan Semiconductor Manufacturing Company Limited (TSM). BRK.A acquired about 60 million American depository shares of TSM in the three months ended September.

With a $414.52 billion market capitalization, TSM manufactures, packages, tests, and sells integrated circuits and other semiconductor devices globally. The super-advanced semiconductor chips that TSM produces are difficult to make due to their high development costs.

TSM also accounts for an estimated 90% of the world’s super-advanced computer chips. The company now has planned to bring its most advanced technology to Arizona to produce 3-nanometer chips. TSM is also expected to be a focal point in the technology race between the United States and China.

The stock is down 12% over the past six months but has gained 25.4% over the past month to close its last trading session at $79.93.

Here are the factors that could influence TSM’s performance in the near term:

Solid Financials

For the fiscal third quarter ended September 30, TSM’s net revenue increased 47.9% year-over-year to $20.23 billion. Income from operations grew 81.5% from the prior-year quarter to $10.24 billion. Its net income and earnings per ADR came in at $9.27 billion and $1.79, up 79.6% and 79.8% year-over-year, respectively.

Robust Profitability

TSM’s trailing-12-month EBIT margin and EBITDA margin of 47.20% and 68.04% are 637.7% and 464.8% higher than the industry averages of 6.40% and 12.05%, respectively. Its trailing-12-month net income margin of 42.51% is significantly higher than the industry average of 3.42%.

Its trailing-12-month ROCE, ROTC, and ROTA of 36.67%, 19.33%, and 19.01% are 633.1%, 496.4%, and 999.6% higher than their respective industry averages of 5.00%, 3.24%, and 1.73%.

Discounted Valuation

In terms of its forward P/E, TSM is trading at 13.08x, 45% lower than the industry average of 23.80x. The stock’s forward non-GAAP PEG of 0.60 is 61.6% lower than the industry average of 1.55.

In terms of forward EV/EBITDA, it is trading at 7.62x, 38.7% lower than the industry average of 12.43x. Its forward Price/Cash Flow multiple of 8.54 is 52.2% lower than the industry average of 17.85.

Favorable Analyst Sentiment

The consensus EPS estimate of $1.75 for the quarter ending December 2022 indicates a 52.2% year-over-year increase. Likewise, the consensus revenue estimate for the same quarter of $20.25 billion reflects a rise of 28.7% from the prior-year quarter.

Street revenue and EPS estimates for the current year (fiscal 2022) of $75.44 billion and $6.52 indicate 58.3% and 32.8% year-over-year improvements. Its EPS is estimated to grow 21.5% per annum over the next five years.

POWR Ratings Reflect Promising Prospects

TSM’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. TSM has a Quality grade of A, in sync with its impressive profitability scenario.

The stock has a B grade for Growth and Sentiment, consistent with its robust growth in the last reported quarter and favorable analyst estimates.

In the 92-stock Semiconductor & Wireless Chip industry, TSM is ranked #14.

Click here to see the additional POWR Ratings for TSM (Value, Momentum, and Stability).

View all the top stocks in the Semiconductor & Wireless Chip industry here.

Bottom Line

TSM is well-positioned to benefit from its investment in Arizona. Moreover, the company’s bottom-line growth in the last reported quarter is promising. Wall Street analysts expect a 24.5% upside in TSM’s stock price. Hence, this Warren Buffet holding could be a solid buy now.

How Does Taiwan Semiconductor Manufacturing Company Limited (TSM) Stack up Against Its Peers?

While TSM has an overall POWR Rating of B, one might consider looking at its industry peers, Renesas Electronics Corporation (RNECF) and United Microelectronics Corporation (UMC), which have an overall A (Strong Buy) rating.

TSM shares rose $1.59 (+1.99%) in premarket trading Tuesday. Year-to-date, TSM has declined -31.45%, versus a -15.53% rise in the benchmark S&P 500 index during the same period.

About the Author: Anushka Dutta

Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research. More...

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