Headquartered in Hsinchu City, Taiwan, Taiwan Semiconductor Manufacturing Company Limited (TSM) provides integrated circuits and other semiconductor devices internationally.

Although the company’s business was dampened by end-market demand weakness and customers’ inventory adjustment, its fourth-quarter revenue increased by 42.8%, while net income and EPS both grew by 78%. Its gross margin for the quarter was 62.2%, operating margin was 52%, and net profit margin was 47.3%.

Based on the company’s current business outlook, management expects revenue for the first quarter of fiscal 2023 to be between $16.70 billion and $17.50 billion. Its gross profit margin will likely arrive between 53.5% and 55.5%, while its operating profit margin is expected to come between 41.5% and 43.5%.

Last month, Taiwan passed its Chips Act with tax credits for chipmakers. Taiwanese lawmakers introduced new rules allowing local chip firms to turn up to 25% of their annual research and development expenses into tax credits as part of the country’s efforts to keep cutting-edge semiconductor technologies at home and maintain the island’s technology leadership.

The newly passed law also offers Taiwanese chipmakers a 5% tax credit for buying new equipment that supports the most advanced chipmaking technologies. This move by the Taiwanese government is expected to benefit TSM significantly.

While 2022 was a rough year for chip stocks, with various macroeconomic forces against them, TSM continued to reward its shareholders with reliable dividends. It pays a $1.82 per share dividend annually, which translates to a 1.89% yield on the current price. Its four-year average dividend yield is 2.46%. The company’s dividend payouts have grown at a 9.6% CAGR over the past five years.

Shares of TSM have gained 11.2% in price over the past month and 7% over the past six months to close the last trading session at $97.96.

Here’s what could influence TSM’s performance in the upcoming months:

Positive Latest Developments

In December 2022, TSM announced a second chip plant for Arizona to begin production of highly coveted 3nm process technology in 2026. The second fab will join TSM’s first under-construction fab in Arizona, which is scheduled to begin production of N4 process technology in 2024. The total investment for both plants is expected to be nearly $40 billion.

On completion, TSM’s Arizona-based two fabs will manufacture over 600,000 wafers annually, with an estimated end-product value of approximately $40 billion.

Moreover, on October 27, TSM announced the Open Innovation Platform (OIP) 3DFabric Alliance at the 2022 Open Innovation Platform Ecosystem Forum. TSM’s first-of-its-kind alliance in the semiconductor industry will help customers achieve speedy silicon and system-level innovations and enable next-generation HPC and mobile applications using TSM’s 3DFabric technologies.

Robust Financials

For the fiscal fourth quarter ended December 31, 2022, TSM’s net revenue increased 42.8% year-over-year to $19.93 billion, and its gross profit grew 68.7% from the year-ago value to $12.40 billion. The company’s income from operations came in at $10.36 billion, up 77.8% year-over-year.

Furthermore, the company’s net income increased 77.8% year-over-year to $9.43 billion, while its EPS came in at $0.36, an increase of 78% year-over-year. As of December 31, 2022, TSM’s cash and cash equivalents stood at $43.72 billion, up 26.1% year-over-year.

Favorable Analyst Estimates

Analysts expect TSM’s revenue for the current fiscal year (ending December 2023) to increase 2.6% year-over-year to $76.42 billion. In addition, the company’s revenue and EPS for the next fiscal year are expected to grow 20.2% and 23.6% year-over-year to $91.85 billion and $7.94, respectively. Moreover, it has surpassed the consensus EPS estimates in each of the trailing four quarters.

High Profitability

TSM’s trailing 12-month gross profit margin of 59.56% is 21.8% higher than the industry average of 48.92%. Likewise, the stock’s trailing-12-month EBITDA margin and net income margin of 68.84% and 44.90% compare to the industry averages of 11.14% and 2.98%, respectively.

In addition, TSM’s trailing-12-month ROCE, ROTC, and ROTA of 39.90%, 20.85%, and 20.47% are significantly higher than the respective industry averages of 4.87%, 2.97%, and 1.42%. Its trailing-12-month CAPEX/Sales of 47.82% is 1,825.6% higher than the 2.48% industry average.

POWR Ratings Show Promise

TSM has an overall rating of B, which equates to a Buy in our POWR Ratings system. The POWR Ratings are calculated by taking into account 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 an A grade for Quality, consistent with its higher-than-industry profitability metrics.

In addition, TSM has a B grade for Momentum. The stock is trading above its 50-day and 200-day moving averages of $84.54 and $81.97, respectively, indicating an uptrend. Also, the stock has a B grade for Sentiment, in sync with favorable analyst estimates.

TSM is ranked #20 out of 92 stocks in the B-rated Semiconductor & Wireless Chip industry. Click here to access TSM’s Growth, Value, and Stability ratings.

Bottom Line

World’s leading semiconductor foundry, TSM’s revenue has increased at a 28.4% CAGR over the past three years, while its EBITDA and net income have grown at CAGRs of 33.4% and 42.1%, respectively. Furthermore, the company’s growth prospects look bright with its industry’s leading process technologies and portfolio of design enablement solutions.

The newly passed Chips Act with tax credits for local chipmakers should significantly benefit TSM. Given its solid financials, attractive dividends, high profitability, and promising growth prospects, this chip stock could be a big winner this year.

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

TSM has an overall POWR Rating of B, equating to a Buy rating. Check out these other stocks within the Semiconductor & Wireless Chip industry with an A (Strong Buy) rating: United Microelectronics Corp. ADR (UMC), SUMCO Corporation (SUOPY), Tower Semiconductor Ltd. (TSEM).

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TSM shares fell $5.71 (-5.83%) in premarket trading Wednesday. Year-to-date, TSM has gained 24.10%, versus a 7.52% rise in the benchmark S&P 500 index during the same period.

About the Author: Mangeet Kaur Bouns

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions. More...

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