Earnings season for the fourth quarter of 2022 kicked off last week with Taiwan Semiconductor Manufacturing (TSM 1.03%) -- otherwise known as TSMC -- releasing its quarterly results. The leading maker of high-end computer chips continued to impress investors, with shares soaring over 10% in the days following the press release. Even renowned investor Warren Buffett recently bought a stake in the business, purchasing $4 billion worth of stock for Berkshire Hathaway in the third quarter.
So what is drawing all these investors to buy TSMC? Let's find out -- and see whether you too should buy shares of the semiconductor giant in 2023.
Strong Q4 and 2022 Results
TSMC's Q4 results showed strong growth and margin expansion, a theme for the business in 2022. Revenue grew 26.7% year over year to $19.9 billion for the last three months, which was driven by impressive growth from the company's high-performance computing customers. These customers include cloud infrastructure providers, artificial intelligence (AI) researchers, and other companies looking to build extremely fast computers.
TSMC's operating margin was 52% in Q4, making it one of, if not the, most profitable manufacturing businesses in the world. Operating margin was up over 10 percentage points from Q4 last year. This shows the phenomenal economies of scale and pricing power TSMC is able to achieve as one of the two companies along with Samsung that can make cutting-edge computer chips.
For the full year, TSMC generated $76 billion in revenue and $37.76 billion in income before taxes, up from $56.82 billion and $21.9 billion, respectively, in 2021. Right now, TSMC is one of the largest companies in the world by net income, producing more on an annual basis than payments giants Visa and Mastercard combined.
Notable growth trends should continue
The computer chip market has grown at an impressive rate in recent years and shows no signs of slowing down. Demand for semiconductors is booming as they are the key input to multiple large and fast-growing industries. These include, but are not limited to:
- Smartphones. TSMC's largest customer is Apple, which makes up an estimated 25% of its overall chip sales.
- Cloud computing. The cloud industry is expected to grow at 15% a year through 2030. The backbone of the industry are semiconductors from companies like Nvidia, Advanced Micro Devices, Alphabet, and Amazon, all of whom are TSMC customers.
- Electric vehicles. This cleaner form of transportation requires more computer chips than combustion engine vehicles to operate. As the industry grows this decade, this should drive more demand to TSMC.
- Artificial intelligence. AI is going through a boom right now with new consumer products like ChatGPT. These AI models require tons of computing power, which means they will need a lot of computer chips to operate.
It may not be a smooth journey given the historical cyclicality of the semiconductor market, but demand for computer chips around the world should be higher five and 10 years from now. As long as TSMC maintains its market share for advanced semiconductors, its revenue and profits should grow along with the broader industry.
NYSE: TSM
Key Data Points
Should you buy the stock this year?
If you want to invest in the semiconductor space, buying shares of TSMC looks like a great way to do it. At a current market capitalization of $428 billion and with $34 billion in net income last year, the stock trades at a price-to-earnings (P/E) ratio of just 12.6. The S&P 500, for reference, has an average P/E of 20.8 at the moment. For a business with minimal competition in a fast-growing market, a P/E significantly below the market average looks like a steal, making TSMC a good bet for investors at today's prices.
