Will Taiwan Semiconductor Outperform in 2011?

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Each year, we take a look back in order to look ahead. We do this by industry, by trend, and ultimately by stock. Here's a closer look at Taiwan Semiconductor (NYSE: TSM  ) , Fool style.

Foolish facts


Taiwan Semiconductor

Motley Fool CAPS rating (out of 5) ****
Total ratings 1,363
Percent bulls 97.2%
Percent bears 2.8%
Bullish pitches 179 out of 185
Highest rated peers IXYS, Microchip Technology, Trident Microsystems

Data current as of Dec. 30.

Fools have good reason to like Taiwan Semiconductor. As the world's leading foundry, the company manufacturers processors for some of the chip industry's biggest names. NVIDIA (Nasdaq: NVDA  ) , Advanced Micro Devices (NYSE: AMD  ) , and Qualcomm (Nasdaq: QCOM  ) are customers.

"…[M]arket leader, low P/E, super strong balance sheet, very attractive dividend, excellent long term demand prospects as the world adopts digital technology that also spurs demand for analog components," Foolish investor DUBLE wrote last month.

Looking back to look forward
Several Fools made similar pitches. But that's understandable; growth was a major theme in this year's coverage of Taiwan Semiconductor at

  • In April, the company said revenue doubled in the first quarter to record levels. Profits also reached uncharted territory. An industrywide chip shortage had customers fighting for capacity at Taiwan Semi's facilities.
  • Two months later, a few Fools were asked to offer our best dividend stock ideas. Yours truly offered up -- yep, that's right -- Taiwan Semi. At 3%, the stock continues to yield a substantial premium to the market average.
  • By July, CAPS investors had assigned Taiwan Semi their highest rating (five stars) on the strength of its competitive position. At the time, the company controlled 45% of the contract chip market. Today, Taiwan Semi is more than three times the size of its closest competitor, United Microelectronics (NYSE: UMC  ) , and nine times the size of Semiconductor Manufacturing (NYSE: SMI  ) .
  • Around the same time, management reported yet another blowout quarter. Revenue improved 41% and profits rose 65% in Q2. Yet neither number was enough to push the stock higher. Investors feared management's capital spending plans, thinking they'd result in a margin-destroying glut after short-term capacity issues were resolved.
  • In September, rival Globalfoundries received a $10 billion capacity infusion by way of new facilities planned for New York and Abu Dhabi. We've yet to see Taiwan Semi suffer any ill effects from the build-out, but it's likely the increased competition will push the chip-making king to keep improving.
  • Finally, in November, Intel (Nasdaq: INTC  ) previewed a plan to open some of its manufacturing capacity to third parties. It's an intriguing idea, but not quite an attempt to enter contract manufacturing en masse -- the market Taiwan Semi and Asian peers already serve so well.

If Intel's tempted to give contract manufacturing a go, it may be because of the numbers. Taiwan Semi has performed impressively over the past year:

2009-2010 Quarterly Performance

Q4 2009

Q1 2010

Q2 201)

Q3 2010

Revenue growth 42.6% 133.4% 41.4% 24.8%
Normalized net income growth 165.5% 2,048.6% 60.2% 34.6%
Gross margin 48.5% 47.9% 49.5% 50.0%
Return on capital 17.2% 16.3% 19.1% 19.5%

Source: Capital IQ, a division of Standard & Poor's.

Even so, the salad days aren't over. Here's what analysts expect from Taiwan Semiconductor over the next two years, according to data compiled by Capital IQ:

Capital IQ Estimates



Revenue estimate 457,110 million TWD 496,978 million TWD
Normalized profit per share estimate 5.99 TWD 6.16 TWD

Source: Capital IQ, a division of Standard & Poor's. Data current as of Dec. 30.

Foolish outlook: bullish
Taiwan Semiconductor is one of five tech stocks I bet on in a very public three-year contest with Mr. Market back in 2008. The numbers swayed me then, and they still do. I'm comfortable holding this stock both for the year ahead and for years to come.

Now it's your turn to weigh in. What do you think of Taiwan Semiconductor's prospects at current prices? Use the comments box below to explain your thinking. You can also join me in rating Taiwan Semiconductor in Motley Fool CAPS.

What will be next year's best stock? The Motley Fool has created a brand new free report called "The Motley Fool's Top Stock for 2011." In it, we reveal the little company set to profit from the broadband Internet expansion. Get instant access by clicking here – it's free.

Interested in more info on the stocks mentioned in this story? Add Taiwan Semiconductor, NVIDIA, Advanced Micro Devices, Qualcomm, United Microelectronics, Semiconductor Manufacturing, or Intel to your watchlist.

Intel is a Motley Fool Inside Value pick. NVIDIA is a Motley Fool Stock Advisor selection. Motley Fool Options has recommended subscribers purchase Intel calls. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He owned shares of Taiwan Semiconductor at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has stock positions in Intel and Qualcomm and a call position in Intel. The Fool is also on Twitter as @TheMotleyFool. Its disclosure policy is a lookie-loo.

Read/Post Comments (1) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 03, 2011, at 3:53 PM, jtr1939 wrote:

    A little late to the party, but I bought shares a few weeks ago. Hopefully, it will do as well in 2012 as it has in 2011. Actually I bought it for the dividends, but growth is nice too.


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