Is Taiwan Semiconductor stock still a buy?

Taiwan Semiconductor Manufacturing (TSMC) (TSM 0.24%) can be a conundrum for investors. It dominates advanced semiconductor manufacturing, giving it a pivotal role in the supply chain of all top chip companies.

However, challenges unique to the company may make investors hesitant, despite the company’s obvious importance. Thus, investors must consider numerous factors before deciding whether TSMC is a buy.

TSMC status

Perhaps no company has benefited more from outsourcing manufacturing than TSMC. As more chip design companies decided it was better to outsource manufacturing, such semiconductor companies became more important.

TSMC and its competitor Samsung stood out because they were willing to invest whatever it took to produce the world’s most advanced chips. Over time, this would propel TSMC to a 62% market share in the industry by the first quarter of 2024.

However, taking advanced production into account, this percentage reaches 90%. Moreover, high-end niches such as the AI ​​chip market have stood out for their rapid growth. Allied Market Research predicts a 38% compound annual growth rate (CAGR) for the AI ​​chip market through 2032. This is well above the 6% CAGR that the same researchers predicted for the overall semiconductor market.

Thus, TSMC benefits from its close relationship with Nvidia. Also, because it produces chips for Advanced microdevices, Qualcomm, Appleand much more, is at the heart of this production.

Unfortunately, other factors are giving investors pause about TSMC. First, most of its production is in Taiwan. Many investors feared that China would invade that island, an action that could destroy most of TSMC’s manufacturing capacity, and such risks were enough for Warren Buffett to sell his TSMC stake.

Another concern is the growing competition. Samsung is ramping up the fab build to better compete, and with the push to produce more in the US and Europe, Intel spends tens of billions annually to build the world’s most advanced factories away from Taiwan.

TSMC, from a financial point of view

For now, TSMC is likely benefiting from the anticipated growth, as revenue of nearly $40 billion in the first half of 2024 is up 28% from a year ago.

However, gross margins fell to 53% for that period, compared to 55% in the first two quarters of 2023. The company blamed rising production costs for its 3nm chips. That led to net income of just under $15 billion, up 22% from last year.

Those rising costs haven’t stopped TSMC stock from nearly doubling in value. However, this growth brings growing concerns about its valuation. Thanks to the higher stock price, the P/E ratio recently increased to 31. This recent increase has taken the earnings multiple to the highest levels since the end of the 2021 bull market.

Additionally, fabs like TSMC didn’t command the P/E ratios of customers like Nvidia or AMD. This is likely because the market is mindful of its geopolitical challenges. Therefore, investors should likely see earnings multiples as high, possibly meaning the stock price could be ahead of the company’s growth.

Is TSMC still an acquisition?

When all factors are considered, TSMC stock remains a buy.

This call does not mean that investors should dismiss TSMC’s concerns. Indeed, an invasion of Taiwan is unlikely, but possible. Still, the current P/E ratio is low enough to serve as a discount that accounts for geopolitical dangers, while high enough that new investors should probably use dollar cost averaging when buying stocks.

Moreover, investors should be mindful of growing competition, and Samsung and Intel are likely to claim a large share of advanced manufacturing. However, a 38% CAGR on AI chips likely means that a rising tide should lift all boats. Because of TSMC’s status as the fabled biggest company, no “boat” is more likely to grow bigger than Taiwan Semiconductor Manufacturing.