Founded in 1987 and is based in Hsinchu, Taiwan, Taiwan Semiconductor Manufacturing Company Limited’s (TSM) was the world’s first semiconductor foundry. Its share price has declined 13.4% amid a broader tech sell-off since hitting its all-time high of $142.20 on February 16.

However, it has gained 126.6% over the past year to close yesterday’s trading session at $121.27. This can be attributed primarily to increasing demand for its integrated circuits (ICs) and semiconductor products.

Established tech companies like Apple Inc. (AAPL), Advanced Micro Devices Inc. (AMD), NVIDIA Corp. (NVDA) and QUALCOMM Incorporated (QCOM) rely on TSM  for their semiconductor supplies.  And, as  the world experiences a semiconductor shortage, TSM is ramping up its production to meet the market demand.

TSM’s solid financials  indicate a rebound in its stock price  in the near term. Its revenue increased 16.7% year-over-year to $12.92 billion for the first quarter ended March 31, 2021, driven by greater high-performance computing (HPC)-related demand. Its net income also increased 19.4% year-over-year in the first quarter, while its earnings per ADR came in at $0.96, up 19.4% year-over-year.

Click here to checkout our Semiconductor Industry Report for 2021

So, here’s what we think could shape TSM’s performance in the near term:

Industry Tailwinds

The demand for semiconductors is on the rise worldwide and their shortage is driving an increase in price. With strong  market dominance and large production capacity, TSM is expected to capitalize on this trend. In fact, a senior Taiwanese government minister said on April 23, 2021 that, “Taiwan’s key semiconductor industry has years of growth ahead of it with no worries about oversupply despite a massive capital investment programme.”

TSM announced on April 22, 2021 that $2.89 billion in spending has been approved to increase its production capacity. Also, the  company announced earlier this month that it plans to invest $100 billion over the next three years to increase capacity at its plants. Furthermore, the European Union is  seeking to encourage greater investment from Taiwan, especially by  its semiconductor companies, which  have significant market dominance, such as TSM.

Impressive Historical Growth

TSM’s stock has gained 380.3% over the past five years and 217.7% over the past three years thanks to its market dominance. Its  revenue increased at an 11.9% CAGR over this period. And the  company’s EBITDA and EPS increased at CAGRs of 12.2% and 15.9%, respectively, over the same period.

Favorable Analyst Estimates

Analysts expect TSM’s revenue to increase by 25.7% for the current quarter, ending June 30, 17.6% for the quarter ending September 30,  and 22% in its fiscal year 2021. The company’s EPS is expected to grow 16.7% in the current quarter, 16.2% in its fiscal year 2021 and 15.5% in its fiscal year 2022. Its  EPS is expected to grow at a rate of 15.9% per annum over the next five years.

POWR Ratings Reflect Rosy Prospects

TSM has an overall B rating, which equates to Buy in our POWR Ratings 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 different categories. TSM has a B grade for Sentiment also, which is consistent with favorable analyst sentiment.

The stock has gained 39.9% over the past six months and 4% over the past month, which helped it earn a B grade for Momentum.

It also has a B grade for Quality, which is in sync with its 53.2% trailing-12-month gross profit margin, which is higher than the 48.6% industry average. Its 29.9% trailing-12-month return on common equity and 18.5% trailing-12-month return on total assets are also significantly higher than their respective industry averages.

TSM is ranked #35 of 98 stocks in the B-rated Semiconductor & Wireless Chip industry. Click here to see the additional POWR Ratings for TSM (Growth, Value, and Stability).

If you’re looking for other top-rated stocks in the Semiconductor & Wireless Chip industry, with an Overall POWR Rating of A or B, you can access them here.

Bottom Line

While TSM’s stock has declined since mid-February due to a broader tech sell-off, its financials are quite strong, and it is also witnessing increasing demand for its semiconductor products. Because this  demand is expected to continue driven by the 5G, artificial intelligence (AI), and electric vehicles (EVs) sectors, it could reward investors  to buy the dip in TSM’s  stock.

Click here to checkout our Semiconductor Industry Report for 2021

TSM shares were trading at $118.91 per share on Wednesday morning, down $2.36 (-1.95%). Year-to-date, TSM has gained 9.38%, versus a 12.06% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...

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