Taiwan Semiconductor Inventory: Pullback Provides A GARP Alternative (NYSE:TSM)

TSM inventory Q2: Robust outcomes met market panic

I final wrote on Taiwan Semiconductor Manufacturing Firm Restricted (NYSE:TSM) again in April 2024. As you may see from the chart beneath, that article, titled “Taiwan Semiconductor Inventory Is Breaking Out (Technical Evaluation),” was printed on April 17, 2024. Because the title suggests, the article was extra targeted on the technical buying and selling patterns of the inventory. Particularly, I argued for a bull thesis primarily based on the next concerns:

Taiwan Semiconductor Manufacturing Firm Restricted is effectively positioned to interrupt out of a multi-year resistance degree close to $130. I see each sturdy technical and basic alerts that may help such a breakout. Judging by Taiwan Semiconductor’s income traits, the contracting part of the present cycle is ending, whereas the growth part is beginning.

Since then, there have been a number of key developments surrounding the inventory. At first, the corporate has launched its 2024 Q2 earnings report (ER). The outcomes have been fairly sturdy in my opinion (extra on this in a minute) and the ER additionally described a number of key developments in its enterprise operations. Second, the current inventory market panic has induced fairly a big value volatility for the inventory. As seen within the chart above, the inventory did get away of the $130 degree since my final writing and has staged an distinctive rally to a peak of round $193. The value has corrected amid the market turbulence to its present degree.

These developments motivated this follow-up protection on the inventory. In distinction to my final article, this text will likely be totally targeted on the basics. And you will notice that my up to date evaluation nonetheless factors to a purchase ranking. Extra particularly, the mixture of its value pullback and progress drivers made the inventory a great GARP alternative (progress at an inexpensive value).

TSM inventory Q2 recap

As aforementioned, the corporate delivered a sturdy Q2 in my opinion. The financials beat consensus on each traces and the enterprise made appreciable progress on a number of key fronts. The chart beneath exhibits the highlights of TSM’s 2024 earnings outcomes. As seen, income reached $20.82 billion, exceeding expectations by $0.73 billion. Earnings per share got here in at $1.48, beating estimates by $0.06. When it comes to enterprise operations, wafer cargo reached 3,125 thousand (12-inch equal wafers).

Additionally, notably, by way of product combine, modern 3-nanometer shipments accounted for 15% of wafer income, adopted by 5-nanometer for 35%, and 7-nanometer for 17%. In different phrases, superior applied sciences (seven nanometers and beneath) accounted for 67% of its Q2 wafer income, which compares favorably to final 12 months’s comparable-period tally of ~51%. Superior applied sciences carry greater margins than different merchandise, which gives extra progress potential for earnings. I’ll revisit this level a minute later.

TSM inventory: Progress outlook and valuation

Trying forward, the market forecasts speedy earnings good points within the subsequent few years. Extra particularly, the chart beneath exhibits the consensus EPS estimates for TSM inventory within the subsequent few years. As seen, analysts challenge a major year-over-year (YoY) progress in EPS within the subsequent two fiscal years, with an estimated 26.41% improve for FY24. This speedy progress is then anticipated to proceed into FY25, with a projected YoY progress of 26.81%. Nevertheless, the expansion fee is anticipated to decelerate in FY26, however nonetheless at a YoY fee of 12.35%.

Buying and selling at a ahead P/E ratio of 23.7x presently, TSM is just not low-cost by any requirements. Nevertheless, contemplating the speedy progress, the P/E a number of is predicted to contract rapidly to 18.71 in FY25 and to 16.66 in FY26. When it comes to the PEG (P/E progress ratio), a 23.7x P/E and a projected progress fee of 26%-plus translate right into a PEG ratio of 0.91 solely, noticeably beneath the perfect threshold of 1x most GARP buyers search.

The query is in fact whether or not TSM can materialize the consensus projected progress charges. I do see good odds for the projected charges to supplies for a number of causes. The highest three on my checklist embody its main scale and know-how, the secular demand for high-performance computing (HPC) chips, and likewise its margin growth potential.

TSM is a frontrunner within the foundry area, which is projected to develop at a CAGR of 25% between 2024 and 2032, in response to the next ZION report. I anticipated TSM to seize a big portion of this progress attributable to its main scale and favorable product combine as aforementioned. TSM (and the foundry trade normally) has confronted some seasonal weaknesses for smartphone merchandise. Nevertheless, my view is that stable demand for TSM’s HPC chip capacities needs to be greater than sufficient to offset such seasonal fluctuations.

Lastly, as aforementioned, superior applied sciences (7 nm and beneath) accounted for greater than two-thirds of its Q2 wafer income. Such superior applied sciences face far decrease competitors stress and thus take pleasure in far greater pricing energy. I anticipate TSM to leverage such pricing energy (because it has achieved skillfully prior to now) to enhance margins and enhance earnings. As a stay instance, TSM introduced value raises on 5nm and 3nm nodes in 2025 shortly after its Q2 ER. Quote:

Taiwan Semiconductor will elevate the costs on how a lot it fees its clients for its 5nm and 3nm manufacturing course of nodes in 2025, Digitimes reported. The worldwide foundry has already began to inform purchasers to anticipate a rise between 3% and eight%, the information outlet added, citing sources at built-in circuit design homes.

Different dangers and remaining ideas

When it comes to draw back dangers, TSM and its friends share widespread dangers reminiscent of financial downturns (which may scale back demand for semiconductors), intense competitors, heavy capex investments, and so forth. Nevertheless, TSM faces distinctive challenges. The highest one is its geographical threat. Its concentrated manufacturing in Taiwan exposes it to geopolitical dangers, together with potential commerce restrictions or disruptions attributable to tensions with China.

Additionally, TSM normally boasts an outstanding profitability grade, as seen within the chart beneath. It outperforms the sector median throughout all metrics by a large margin. For instance, gross revenue margin stands at 53.36%, exceeding the sector by 8.15%. EBIT, EBITDA, and internet revenue margins are exceptionally excessive at 41.99%, 67.32%, and 37.85%, respectively, every considerably surpassing the sector common by triple-digit percentages. Nevertheless, its internet revenue margin is presently beneath its historic common. And its gross margin is just 0.44% above its historic common as seen. These might be because of the ongoing inflation stress and/or competitors stress. With the pricing energy from its superior nodes and potential value raises, I anticipate the margins to additional enhance.

To conclude, the objective of this follow-up article is to look at the brand new developments reported in its Q2 ER and the impression of value corrections amid the continuing market turbulence. My remaining verdict is to take care of my purchase ranking. In a nutshell, I see a robust GARP candidate – a frontrunner in a sector that enjoys sturdy secular progress for gross sales at 0.91x PEG.