If you were hoping for Taiwan Semiconductor Manufacturing (TSM 3.43%) stock to fall after offering up weak guidance for the coming first quarter, you were likely disappointed when the stock of the leading manufacturer of semiconductor chips instead took off. It now trades about 10% higher than it did before its report.
Having bottomed at around $60 per share in October, shares have gained 51% since, in part from the vote of confidence coming from Warren Buffett's Berkshire Hathaway buying a large, 60-million-share tranche. Yet they are still over a third less than the price they traded at one year ago, so have you missed the chance to get in on this foundry pure-play, or is there still more room for the chipmaker's stock to run?
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One step back, two steps forward
Taiwan Semiconductor's earnings report did not predict good news for the health of the industry for at least the first six months of 2023. The chipmaker, which counts most of the biggest chip designers, including Advanced Micro Devices, Apple, Broadcom, and Nvidia, as customers, expects revenue to decline sequentially some 14%, and gross margins could plunge to 53% from 62% this past quarter. Operating margins could drop from 52% down to 41%.
Most of the foundry's plants are based in Taiwan, yet most of its customer base is international. In response, it's looking to open two new plants in the U.S.
Although the entire semiconductor industry has been dragged lower by ongoing supply chain problems and falling demand for smartphones and consumer electronics, Taiwan Semiconductor has been able to remain above the fray as the data center market has been resilient. But now the chipmaker says demand is starting to soften there, too.
CEO C.C. Wei told analysts Taiwan Semiconductor expects revenue to fall by mid- to high-single-digit percentage rates over the first half of 2023 compared to the same period last year.
As discouraging as this sounds, there's actually good reason to believe Taiwan Semiconductor will continue to be a top-notch stock to own, and you won't regret buying its shares now.
Keeping one step ahead of the competition
As noted, the chipmaker is different from many of its rivals because it is a pure-play foundry. That allows it to focus on its core strength, which is chip production, because it manufactures chips for other companies rather than producing its own branded products. Its clients do the heavy lifting of product development and marketing.
Having some of the biggest names in the tech industry as customers ensures it is feeding chips into the broadest possible range of the economy, ensuring its downside is protected if one sector or another falters. There is always someone picking up the slack.
Taiwan Semiconductor is also well ahead of the competition as it is beginning to mass produce its latest, most advanced 3-nanometer chip, which will assuredly find a home in the newest technology. Rival Intel, for example, is only just bringing its 7-nanometer chip to market. While Intel is both a foundry and a design company, it is a step behind Taiwan Semiconductor, whose 5-nanometer chip currently accounts for almost a third of wafer revenue (7-nm chips represent 22% of revenue).
Management maintains that the business will rebound in the back half of 2023, and full-year revenue will exceed that achieved last year.
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Innovation sets it apart
Analysts aren't so sure. They point to the upgrade cycle in consumer electronics that occurred during the pandemic pulling forward sales, so additional upgrades can be postponed during a weakened economy.
That's possible, but Taiwan Semiconductor's scale, hinted at earlier, means it can weather the storm better than its competitors while winning more market share. Moreover, it continues to invest in the next generation of semiconductors and notes that its production of 2-nanometer chips is already being prepared for starting in 2025.
This allows Taiwan Semiconductor to continue generating healthy profit margins and underscores management's belief that long-term gross margins can be maintained at a minimum of 53%.
The chipmaker's stock trades at 12 times next year's earnings estimates and a fraction of its sales. Wall Street still expects Taiwan Semiconductor will be able to grow earnings north of 20% annually for the next five years, and with its dominant position in the industry not about to be assailed, an investor buying shares now will find them to have been very cheap in comparison when looking back.
