Taiwan Semiconductor Earnings Preview: The Juggernaut's Reign Continues

Taiwan Semiconductor (NYSE: TSM  ) is the world's largest contract semiconductor manufacturer. The company has enjoyed robust growth over the past several years, particularly as it -- driven by the successes of customers such as Qualcomm -- has been a key beneficiary of the sheer explosion in mobile device sales. It's worth taking a look at TSMC ahead of its July 17 earnings report.

Sell-side consensus -- expecting big things from the Apple ramp?
Taking a look at consensus estimates, we see that the sell side is expecting Taiwan Semiconductor to register $6.06 billion in sales. Now, TSMC has already reported its monthly sales for each month of the quarter, and the quarter looks like it's shaping up to be $6.092 billion at the current New Taiwan dollar-to-U.S. dollar exchange rate (up 16% year over year). As far as earnings per share goes, consensus is looking for $0.37 a share -- a healthy increase from $0.33 a share in the prior year period.

However, since the current quarter is already in the bag, the real question is what the next quarter is going to look like. It's likely that TSMC is already shipping the next-generation A8 chip to Apple for the upcoming iPhone release. (Apple does need lead time to actually build the things.) As the iPhone 6 build-out continues -- and if the iPhone 6 uses the TSMC-built 20-nanometer MDM9x35 modem -- then TSMC could continue to see very healthy growth in the coming quarters.

Commensurate with this qualitative description, the sell-side seems to be calling for guidance of $6.58 billion for the coming quarter and earnings per share of $0.43 for the third quarter of 2014. The boost associated with the iPhone 6 build-out is probably more than enough to drive this growth.

How's the valuation look?
Valuing tech stocks is often tricky because tech stocks often go up as they beat estimates and generally have a good long-term picture. TSMC, to date, has been very good about beating estimates. Further, as the leading edge of the logic foundry business has consolidated -- it's an effective duopoly between TSMC and Samsung (NASDAQOTH: SSNLF  ) -- the supply/demand balance has been in favor of the last players standing.

That said, if you believe the consensus, TSMC trades at about 15.3 times fiscal 2014 estimates and about 14.68 times fiscal 2015 estimates. This isn't expensive for what has become the de facto central nexus through which most important semiconductor business flows. However, the shares may be getting a discount on the threat that Samsung and GLOBALFOUNDRIES may pose at the 14/16-nanometer manufacturing technology node.

If TSMC does lose leading-edge share to Samsung and GLOBALFOUNDRIES, then this could serve as a meaningful headwind to growth. However, if TSMC ends up sweeping the high-end business as it has historically done, then this discount will have been unwarranted, estimates may go up, and the stock could trade higher.

Foolish bottom line
There's little doubt that Taiwan Semiconductor is the world's leading foundry and that it has done well by its shareholders over the past several years. Though competitive concerns from Samsung and GLOBALFOUNDRIES loom for the 14/16-nanometer generation, it seems that at 20-nanometer, TSMC is the clear winner. This should, at the very least, lead to a few more really strong quarters.

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