Will Taiwan Semiconductor Outperform in 2011?

Each year, we take a look back in order to look ahead. We do this by industry, by trend, and ultimately by stock. Here's a closer look at Taiwan Semiconductor (NYSE: TSM), Fool style.

Foolish facts

Data current as of Dec. 30.

Fools have good reason to like Taiwan Semiconductor. As the world's leading foundry, the company manufacturers processors for some of the chip industry's biggest names. NVIDIA (Nasdaq: NVDA), Advanced Micro Devices (NYSE: AMD), and Qualcomm (Nasdaq: QCOM) are customers.

"…[M]arket leader, low P/E, super strong balance sheet, very attractive dividend, excellent long term demand prospects as the world adopts digital technology that also spurs demand for analog components," Foolish investor DUBLE wrote last month.

Looking back to look forward
Several Fools made similar pitches. But that's understandable; growth was a major theme in this year's coverage of Taiwan Semiconductor at Fool.com:

• In April, the company said revenue doubled in the first quarter to record levels. Profits also reached uncharted territory. An industrywide chip shortage had customers fighting for capacity at Taiwan Semi's facilities.
• Two months later, a few Fools were asked to offer our best dividend stock ideas. Yours truly offered up -- yep, that's right -- Taiwan Semi. At 3%, the stock continues to yield a substantial premium to the market average.
• By July, CAPS investors had assigned Taiwan Semi their highest rating (five stars) on the strength of its competitive position. At the time, the company controlled 45% of the contract chip market. Today, Taiwan Semi is more than three times the size of its closest competitor, United Microelectronics (NYSE: UMC), and nine times the size of Semiconductor Manufacturing (NYSE: SMI).
• Around the same time, management reported yet another blowout quarter. Revenue improved 41% and profits rose 65% in Q2. Yet neither number was enough to push the stock higher. Investors feared management's capital spending plans, thinking they'd result in a margin-destroying glut after short-term capacity issues were resolved.
• In September, rival Globalfoundries received a $10 billion capacity infusion by way of new facilities planned for New York and Abu Dhabi. We've yet to see Taiwan Semi suffer any ill effects from the build-out, but it's likely the increased competition will push the chip-making king to keep improving.
• Finally, in November, Intel (Nasdaq: INTC) previewed a plan to open some of its manufacturing capacity to third parties. It's an intriguing idea, but not quite an attempt to enter contract manufacturing en masse -- the market Taiwan Semi and Asian peers already serve so well.

If Intel's tempted to give contract manufacturing a go, it may be because of the numbers. Taiwan Semi has performed impressively over the past year:

Source: Capital IQ, a division of Standard & Poor's.

Even so, the salad days aren't over. Here's what analysts expect from Taiwan Semiconductor over the next two years, according to data compiled by Capital IQ:

Source: Capital IQ, a division of Standard & Poor's. Data current as of Dec. 30.

Foolish outlook: bullish
Taiwan Semiconductor is one of five tech stocks I bet on in a very public three-year contest with Mr. Market back in 2008. The numbers swayed me then, and they still do. I'm comfortable holding this stock both for the year ahead and for years to come.

Now it's your turn to weigh in. What do you think of Taiwan Semiconductor's prospects at current prices? Use the comments box below to explain your thinking. You can also join me in rating Taiwan Semiconductor in Motley Fool CAPS.

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