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Bull Of The Day: Taiwan Semi (TSM)

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·5 min read
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Taiwan Semiconductor Manufacturing Company, aka TSMC TSM, is the world's largest third-party chip fabricator, responsible for manufacturing most of the world's digital chips, and is a part of 85% of semiconductor innovations. Its cutting-edge manufacturing capabilities are unrivaled, working at an atomic level that no other fabricator can match (3nm transistors). Amid this global chip shortage, TSM is the best-positioned and safest way to play this impending 2022 chip rally.

The most trusted tech giants turn to the most reliable semiconductor foundry for manufacturing and innovative needs. TSMC's customers include companies like Apple AAPL, Nvidia NVDA, Broadcom AVGO, Qualcomm QCOM, and even Intel INTC, which has been unable to keep up with the innovative curve in chip fabrication, which TSMC continues to drive higher.

TSMC exited 2021 with outstanding annual results that illustrated its ability to drive consistent secular growth in an industry previously known for its cyclicality. This chipmaking powerhouse has achieved an incredible compounded annual growth rate (CAGR) of 17.5% and 17.1% on its top and bottom-lines, respectively, since it went public in 1994.

Management is now forecasting that this reliable organic growth (between 15% and 20% CAGR) will continue through 2026. I still view these projections as conservative, considering the accelerating demand for advanced chip technology that the last 2-years of rapid digital adaptation have brought.

In its final 2021 quarterly report in mid-January, Taiwan Semi impressed the markets with December revenues that came in sizably above estimates, catalyzing a 20% rally in less than two weeks of trading. However, TSM shares haven't been immune to recent selling pressures, which have wiped out its fundamentally fueled post-earnings gains.

Now is the time to pull the buy trigger on TSM as analysts drive up estimates and price targets across the board, propelling this stock of the future into a Zacks Rank #1 (Strong Buy).

The Latest Report 

The world's largest semiconductor contractor released its 2021 year-ending earnings, and its stock proceeded to take flight with impressive growth fundamentals fueling its rally. TSM's low-beta shares drove up roughly 20% in less than 2 weeks, touching a fresh all-time high in its post-earnings price action on the highest daily volumes TSM has ever seen as institutions and r/WallStreetBets (WSB) flood into this next-gen champ.

TSMC continues to prove to the investing world that it is so much more than just a third-party chip fabricator, with proven boundless organic growth that never fails to impress analysts' swelling expectations.

TSMC is powering its cutting-edge innovative partners into the next generation of digital advancement. Its high volume 7-to-5 nanometer (nm) chip operations are exploding at an unmatchable pace, now making up 50% of revenues, forcing the world's leading chipmakers to utilize TSMC's unrivaled services to remain competitive.

In fact, the pioneer of advanced chipmaking, Intel INTC, who has fallen behind the innovative-curve in recent years, will be utilizing TSMC's newest 3nm facility in northern Taiwan. Intel's inability to keep up with Taiwan Semi's fabricating abilities signifies a massive tailwind for this global technological backbone and a systemic shift in the industry towards focused business models that leverage niche competitive advantages.

Decades of boundless and consistent growth and a tremendous pull-forward in digital adaptation have accelerated Taiwan Semi's growth trajectory. The best-positioned semiconductor companies are no longer the cyclically-natured commodity-like securities the market had become accustomed to, but secular growth narratives at the heart of this emerging digital renaissance of prolific technological advancement (aka, The 4th Industrial Revolution).

Taiwan Semi's record top and bottom-line fourth-quarter results reflected optimistically on the entire chip sector, and last night's blowout report from Texas Instruments TXN confirms the swelling demand for digital chips across industries.

The Opportunity In Chips

Chipmakers have been experiencing the same valuation multiple compression that has plagued the broader tech sector since the year began. Investors are pulling profits from the massive rally that semis had seen since the pandemic lows ahead of the Fed's meeting. Soaring interest rates and inflation expectations have catalyzed recent selling pressure along with portfolio rotations out of the most risk-heavy equity sectors.

Many investors have hesitated to add tech back into portfolios, even at discounted levels. Still, there seems to be a common consensus that chip stocks are one of the growth segments worth moving on now. As a result, we see momentum reenter this technological backbone as investors rush to their favorite chip stocks.

The global chip shortage has had rippling impacts on numerous sectors of the economy, forcing automakers to reduce manufacturing and even completely halt it in some cases. This is an excellent position to be in for chipmakers, where demand outpaces supply (price control). Capital is pouring into this space, and it looks like the demand is only going to grow in this prolifically digitalizing world.

Final Thoughts

TSM represents the best parts of the semiconductor industry (on a rolling basis) as its supports the fabrication of virtually all leading-edge chip innovators. Taiwan Semi has solidified its global positioning as the manufacturing backbone in this new economic era of burgeoning digital demand, no matter what happens within the competitive tech landscape.

TSM is trading at a forward P/E of 22x, which is the most discounted this stock has been since the trough of the pandemic sell-off of March 2022. With a 1.2% dividend yield, reliable cash flows, and a stronghold of a balance sheet (best credit rating in the industry), there is no reason to hesitate on starting a TSM position today. I'm looking at a 12-month price target between $150 and $175.

Good luck out there!

Dan

Equity Strategist & Editor of The Headline Trader Portfolio at Zacks Investment Research


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