We came across a bullish thesis on Taiwan Semiconductor Manufacturing Company Limited (TSM) on Long-Term Pick’s Substack by Dan. In this article, we will summarize the bulls’ thesis on TSM. Taiwan Semiconductor Manufacturing Company Limited (TSM)’s share was trading at $201.45 as of Jan 14th. TSM’s trailing and forward P/E were 32.90 and 22.73 respectively according to Yahoo Finance.
A high-tech production line of robotic arms assembling a semiconductor chip.
Taiwan Semiconductor Manufacturing Company (TSMC) stands as the world’s largest contract semiconductor manufacturer, producing cutting-edge chips that power a wide array of technologies, from smartphones to artificial intelligence. Renowned for its leadership in advanced process technologies, TSMC controls over 60% of the global foundry market share and collaborates with tech giants like Apple, Nvidia, and AMD. The company’s strategic positioning at the core of the semiconductor supply chain makes it a critical player in meeting the surging global demand for AI, high-performance computing, and mobile devices. This robust market presence underscores its potential for sustained growth, supported by its ability to maintain high profit margins and deliver superior equity returns, distinguishing it from competitors.
TSMC’s technological expertise forms the backbone of its wide economic moat. Innovations such as FinFET and GAA transistor technology ensure its dominance in advanced process technologies, including the cutting-edge 5-nanometer and upcoming 2-nanometer nodes. These innovations, coupled with economies of scale, enable the company to produce chips at significantly lower costs while commanding premium pricing for its advanced technologies. Close partnerships with industry leaders further enhance TSMC’s competitive edge, as these collaborations secure its role in developing next-generation technologies. This synergy between innovation and collaboration not only reinforces TSMC’s leadership but also justifies its heavy investments in R&D, which consistently account for a substantial portion of revenue.
The company’s business strategy focuses on high-value, advanced technology nodes tailored to industries with escalating demand for performance, such as AI, mobile devices, and automotive applications. This approach avoids the commoditization of older technologies while ensuring sustained growth in key market segments. TSMC’s Open Innovation Platform fosters deeper client collaborations, attracting both smaller clients and industry leaders, thereby diversifying its revenue base. Geographical diversification, including the establishment of new facilities in Arizona, addresses geopolitical risks and enhances the company’s operational resilience, positioning it for long-term stability.
TSMC’s core operations are centered on pure-play foundry services, encompassing wafer fabrication and technology platforms that span both advanced and mature process technologies. The company’s offerings are tailored to serve high-growth markets, including high-performance computing, mobile devices, automotive, IoT, and consumer electronics. High demand for semiconductors in these areas, driven by trends such as cloud computing, AI, and the rise of smart vehicles, ensures a steady stream of revenue. Additionally, TSMC’s investment in advanced packaging solutions like 3D ICs and chiplet technologies further solidifies its role in enabling superior chip performance.
Financially, TSMC demonstrates remarkable efficiency and stability. With a consistent return on equity exceeding 20% and disciplined capital allocation, the company strikes a balance between heavy investments in advanced technologies and shareholder returns. Capital expenditures often range between 30% and 50% of revenue, underscoring its commitment to technological leadership. Despite these investments, TSMC maintains strong financial health, reflected in stable earnings and a growing dividend profile. The company’s focus on organic growth and partnerships over major acquisitions highlights its strategic clarity and operational discipline.
Despite its strengths, TSMC faces challenges, including rising electricity costs and geopolitical tensions, particularly given its reliance on Taiwan-based facilities. However, its proactive measures, such as expanding operations abroad and diversifying its revenue streams, mitigate these risks. Additionally, the company’s leadership in advanced technologies and established customer relationships provide a buffer against market uncertainties.
Currently trading below the semiconductor industry’s average valuation metrics, TSMC offers a compelling investment opportunity. The stock’s fair value estimate of $228.59 suggests room for significant appreciation, supported by its robust growth prospects and unmatched operational efficiency. For long-term investors, TSMC represents a rare combination of resilience, innovation, and value, making it a cornerstone in portfolios seeking exposure to the ever-expanding semiconductor industry. The company’s strategic vision, coupled with its ability to navigate challenges, reinforces its position as a global technology leader poised for continued success.
Taiwan Semiconductor Manufacturing Company Limited (TSM) is on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 158 hedge fund portfolios held TSM at the end of the third quarter which was 156 in the previous quarter. While we acknowledge the risk and potential of TSM as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than TSM but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.