1 Stock With a Massive Advantage in Semiconductors

Taiwan Semiconductor Manufacturing (TSM -3.45%) stock is 34% off its high. But there's still a lot to like about the company. 

In this clip from "The Virtual Opportunities Show" on Motley Fool Live, recorded on June 7, Motley Fool contributors Travis Hoium and Jose Najarro discuss some of the reasons TSMC is hard to beat -- both as a chip manufacturer and as a tech investment.

Travis Hoium: I'll just show a little bit of info here. If you're not familiar with Taiwan Semi they're the manufacturer of a lot of the chips that we have been talking about here. Apple's chips are, I think, all made by Taiwan, by TSMC. They're really the leader in the space. They were the one that disrupted Intel's business model by going with this fabless model.

Apple can design chips, Nvidia can design chips. TSMC will put the money in the ground to make the fabrication facility and they can use them on a contract basis, basically. The financials have obviously been phenomenal. They're riding growth from Apple. They've also had a lot of pricing power recently with the chip shortages, which doesn't seem like it's going to end anytime soon. You can see revenues up about 4x in the last 10 years. Net income also up dramatically. But here's what I think is interesting with the market pullback recently. I will just do market cap and P/E ratio.

P/E ratio is only about 20 times earnings at this point. That's a pretty reasonable multiple for a company that I think still has a long growth runway ahead has a lot of pricing power. You talk about companies like Apple, Nvidia, these auto manufacturers who are getting into autonomous driving. We're using more and more chips in everything that we do. There's more companies going to this fabless model where they can design chips that really meet their specific needs. That will be incremental demand for a company like TSMC. The other thing that they can do is when they build a fabrication facility like for example, the M1 and M2 chips that Rachel was talking about are made on their 5-nanometer process. M3 is, I believe when they're going to start using their 3-nanometer process for Apple devices.

It isn't like they're going to blow up their five-nanometer process. They're going to repurpose that for other customers who have, they'll reduce prices. Maybe margins come down a little bit, but they'll keep operating that facility and make chips for cars or maybe lower-end smartphones. There's a lot of runway in growth that the business has long-term, as long as this model is live now, a company like Intel is trying to enter this market and there are some smaller players as well. Over right now, TSMC has a massive advantage in the market at 20 times earnings. I think it's a really good valuation. They are putting hundreds of billions of dollars over the next five to 10 years into increasing their manufacturing capacity. This is a little bit like a telecom, where it's always this expectation of more spending. But over time, they have proven that they have this durable advantage over the competition and have been able to increase net income. I think they're really well positioned strategically and from a valuation standpoint, they're more attractive than they've been in three years or so at this point. That's the one I'm keeping an eye on.

Jose Najarro: I enjoy TSMC a lot of Travis. This is one that, if you're talking about a company that's a market leader, or holds the market leader share. It has over 50% of the market right now in manufacturing. It's No. 1. No. 2 is Samsung with only like 16, 17, 18%. You could see the huge difference between No. 1 and No. 2. The other thing I do want to say is we sometimes we hear a lot of these improvements like Rachel mentioned of like the chips, the M2 chips going to be about 18% stronger. Some of those improvements are actually just based on the technological improvement that TSMC itself has made. Their technology is pretty interesting and one I enjoy a lot.

Hoium: Yeah. Stock is 34% off its high, which it actually hit earlier this year. What's interesting is I don't think there's anything, anybody saying that the company is in a weaker position than it was five or six months ago. Maybe we've gone a little bit off the hype train of the chip shortage. But I still think this is a really well-positioned company and it will be very durable, competitive advantage for a long time.