Taiwan Semiconductor (TSM) is the biggest chip foundry to provide 7 & 5 nanometer chips that became very popular after Apple (AAPL) moved their chip design in-house.
Apple isn’t the only company that works with TSM with other big names like AMD (AMD), Nvidia( NVDA), Broadcom (AVGO), Qualcomm (QCOM) and even companies that also build their own chips like Intel (INTC) & NXP Semiconductors (NXPI) use TSM to increase their capacity.
Late last year the company also received approval to build a $12B chip plant in Phoenix, which will be a welcomed by the US, as chip demand has far outpaced the supply currently available around the world.
I know it might sound weird, but in my opinion, I believe this $500B company which has risen by more than 150% in the last year after the 2020 lows, still has some room to grow.
TSM has a great advantage compared to companies that operate in their industry, as they have invested huge amounts of money in capital expenditures to gain competitive advantages compared to Intel, Samsung, Texas Instruments, Broadcom & others.
One other thing we can see here, is that after the huge spike in price, the dividend yield of the company still has room to recover, as the 4-year average yields stands at over 3%, second only to Qualcomm.
You are also probably wondering what is the MOAT of the company? Do they have a branding value or some kind of dominance over the Marketplace?
Well, from my point of view, TSM has a significant MOAT against most of its competition as they’ve been able to collect huge amounts of knowledge from its diverse base of over 500 customers which have helped them leap ahead of other companies since the 7NM move in 2018.
TSM pretty much supplies all the big companies I mentioned earlier which later pass on the technology to their customers, so it’s very likely that you are using one of their chips in some of your devices, maybe your iPhone, your car, computer or anything else.
You can see HERE, the MOAT TSM has over Intel, as Intel is still a long way back, working on older generation chips, while TSM is leading the pack.
I believe their market dominance in the 7NM & 5NM chips will continue to keep TSM as the preferred manufactured for most fabless companies just like Apple which currently represents over 20% of TSM revenues, it seems to me that TSM is the best foundry to own for the next decade, as the worldwide revenue of semis topped $40B to start 2021, with TSM being the only one of its pears to see a significant growth, with a big chunk of that coming from the huge demand Apple will provide them for the 5NM chips, which accounts for over 50% of their 5NM sales.
Semiconductors are here to stay as technology will only continue to evolve, with smaller & smaller chips in the future and competitors still struggling to catch up with the 5NM technology that TSM already has, so TSM should be poised to remain one of the biggest companies in the world for the foreseeable future.
The upside of TSM stock
First, let’s start with my expectations of the revenue streams, costs of goods, operating expenses and capital expenditures.
I believe we can continue to see a steady growth in their total sales, that will end up doubling by 2025, reaching over $108B. On the other side, I also believe we can continue to see a gross margin of 54%, similar with what we saw last quarter.
The other operating expenses from R&D and SG&A I pretty much expect to remain the same, as this has been steady over the years, so, a 2.7% of the revenues should go in SG&A and 8.3% should continue to go into continued R&D to keep the companies MOAT.
I would say that TSM is very likely to continue to invest a lot of money in Capex to keep up with the increasing semiconductors demand, so this should continue to grow at around 2.5%/year.
All of these numbers should get us an operating income of almost $27B for 2025, though, there are other things like interest income & expenses that we should account for, but for TSM, this should add up to a slight gain of $400M in 2025.
Finally the effective tax rate of the company, has stood under 12% for the last 3 years, but, for safety reasons I will imply a small increase each year, which would result in TSM having a net income of just over $24B in 2025, paying out a dividend of $3.24, while also not diluting their shares, as TSM hasn’t diluted their stock significantly since 2005.
TSM is a must have stock in most portfolios, brining some balance, with good growth ahead of it. TSM might helped lower the beta of most portfolios that are way to heavy on the overhyped tech stocks right now.
Remember, this is just my humble opinion as a retail investor, this is not an investment advice, but my view is that we can see TSM moving towards the $132 range by early next year, with TSM likely to be jump-started again around their next earnings report in April.
Regarding the long-term view, my base TSM target is $150 by 2025, meaning an ROI of 38% which is not that great, but when taking into account the expected dividends received from TSM, that can jump to over 50%.
Speaking personally, my 2025 Price Targets for TSM range from an average of the 25 & 30 PE multiple, my base case from the 30 & 35, while my bull case averages de 35 & 40 PE multiple prices.