Why Taiwan Semiconductor Is Stepping Up Its Investments

Taiwan Semiconductor (TSM 1.57%) is the world's biggest semiconductor manufacturer, which puts it in a unique position during the global chip shortage. That's why it's spending more than $40 billion in capital expenditures this year.

In this episode of "Beat and Raise," recorded on Jan. 20, Fool contributors Will Healy and Brian Withers discuss Taiwan Semi's prospects and why it has such a strong competitive position.

Brian Withers: Looking for Will to come on and talk semiconductors, one of the biggest semiconductor companies in the world, Taiwan Semi.

Will Healy: Well, I'm going to just dive right in. Fourth-quarter revenue came in at $15.7 billion. That was up 21%, that beat expectations, and also know that the $15.7 billion is their figure. I mean, Taiwan uses new Taiwan dollars, but they translate their figures into dollars, so I'm using their information here.

Earnings per share came in at $1.15, that was up 16%. That was also a beat. However, notice that revenue grew faster than earnings. I think this is because they're just investing so much in the business and they're having to expand capacity due to the chip shortage and they're also doing research to get to advance the technology further, so there's some pressure there.

However, the outlook for Q1 is at $16.9 billion, up 26% year-over-year and that is also a raise from where analysts were placing it. I mean, overall, this was a good quarter, except for earnings not keeping up with revenue.

Some things of note for TSMC, in Q3, they were 53% of the foundry market. That's interesting because companies like Nvidia (NVDA 3.36%), like AMD (AMD 2.59%), Qualcomm (QCOM 0.52%), they're fabless, so they depend on TSMC to actually build their chips. If something happened to TSMC, the industry would almost be in the dark ages. So this is probably the most important company in the industry, if not in any industry arguably.

I mentioned the spending earlier. They plan to spend $40-44 billion on capital expenditures this year, and that's a huge amount of money and that may contribute to the shortage that has raised earnings ultimately ending. However, I think they have to do this because all of their competitors are increasing capacity. Again, they have to keep advancing the technology to hold onto their technical lead. That makes a lot of sense they are spending so heavily to maintain their market position.

As for the stock, it trades at about 34 times earnings. I would call that a mid-level valuation. You have stocks, clients like Nvidia and AMD trading at substantially higher multiples while Qualcomm and Intel are much lower. It's really in the middle. Unfortunately, this did not translate to gains over the last year as it's trading relatively flat to where it was.

Withers: It's flat for the year, but if you go back for the five-year chart, it's up 333%, and that's not even including dividends, so, it's had a tremendous run. It feels like maybe it's just pulling back. A lot of my tech stocks over the past year are either flat or in some cases down. So not surprised that this bedrock of the tech community, especially during the silicon shortage, is taking a little bit of a pause on the stock price.

Healy: It is interesting timing though because we've been hearing of the shortage all year and like I said, their clients Nvidia and AMD, those stocks are performing so much better. I don't think people fully appreciate TSMC's role in the industry, and they may be a little hesitant because it's based in Taiwan and China has talked about invading Taiwan, although I don't think it's actually going to happen, but you always have to look over your shoulder. I think the stock trades at somewhat of a discount due to that factor.

Withers: We're running short on time here. I'm going to ask you the same question I did Toby. A-F, how would you grade Taiwan's semiconductors quarter?

Healy: I would say it was A-minus. The only really negative thing I can say is the earnings didn't quite keep up, but I think like I said, they have to spend that money. They have the technical lead right now, but these technical leads are really tenuous even though a lot of people think that nobody can catch up. People left AMD for dead a few years ago and for decades, Intel (INTC -0.04%) had the technical lead and everyone thought that was insurmountable. In this industry, you always have to look over your shoulder.

Withers: Yeah. Only the paranoid survive, the former Intel CEO would say.