Microchip manufacturing foundry Taiwan Semiconductor Manufacturing Company (TSM 4.80%) reported third-quarter results last week, sporting 11% growth on both the top and bottom lines. The results were better than your average Wall Street analyst was expecting, thanks to a rising tide of chips destined for 5G devices.
Let's have a closer look at Taiwan Semi's latest report.
Taiwan Semiconductor's third-quarter results by the numbers
|
Metric |
Q3 2019 |
Q3 2018 |
Change |
|---|---|---|---|
|
Net revenue |
$9.40 billion |
$8.49 billion |
11% |
|
Net income |
$3.24 billion |
$2.90 billion |
12% |
|
GAAP earnings per diluted American depositary receipt (ADR) |
$0.62 |
$0.56 |
11% |
Data source: Taiwan Semiconductor. GAAP = generally accepted accounting principles. One ADR equals five ordinary shares of Taiwan Semi on the Taiwan Stock Exchange.
What's up with Taiwan Semiconductor?
- The analyst consensus had called for earnings near $0.60 per ADR on revenue in the neighborhood of $9.2 billion. Management explained the strong results with surprisingly strong demand for 7-nanometer chips used in premium smartphones and high-performance computing.
- Leading-edge 7nm chips accounted for 27% of total sales in the third quarter, up from 11% a year earlier and 21% in the second quarter.
- Orders from China stood for 20% of total sales, up from 17% in the previous quarter and 15% in the year-ago period. North American orders stopped at 60% of revenues, down from 62% in the third quarter of 2018.
Image source: Getty Images.
Color commentary from CEO C.C. Wei
Taiwan Semi's management said 5G phones should account for roughly 15% of global phone sales in 2020. That's up from the company's previous forecast of high-single-digit percentages, or roughly double the projection issued six months ago. CEO C.C. Wei also took a minute on the earnings call to sketch out how 5G networking should drive a general surge in demand for microchips over the next few years.
"5G will drive AI [artificial intelligence] applications and bring many benefits to the market," Wei said. "Performance will be greatly improved with data transmission speed up to 10 [times] faster as compared to 4G network. In addition, 5G latency will have about a 90% reduction as compared to 4G, allowing for real-time response and control. The benefit from 5G will unlock new use cases such as AR, VR, real-time translation, and high-quality gaming, to name a few."
All of that is good news for Taiwan Semi, because 5G devices will often require the high-margin 7nm manufacturing technology. Rising sales in that category will support generous gross margin and a stronger bottom line.
Is Taiwan Semi a buy today?
Taiwan Semi is firing on all cylinders at the moment, despite a sluggish smartphone market and high-level trade wars slowing down the international economy. The stock has gained a market-stomping 25% over the past 52 weeks but still trades at a fairly reasonable 34 times trailing or 18 times forward earnings. Add in a generous 3.3% dividend yield at today's prices, and you get a tasty blend of growth and value in a single stock.
