Taiwan Semiconductor Manufacturing: A High-Flying Stock with a Hefty Price Tag
The chipmaking industry is booming, and Taiwan Semiconductor Manufacturing (NYSE: TSM) is riding the wave. After a three-year slump, the company is facing unprecedented demand for its services. The artificial intelligence (AI) surge, which started two years ago, shows no signs of slowing down, and modern cars are hungry for processors. The smartphone market is also rebounding from a long downturn. As a result, TSMC’s stock has doubled in 2024, with its market cap hovering around the $1 trillion mark since October.
A High-Tech Business with a High Price
TSMC operates in a capital-intensive industry, requiring massive investments in chipbuilding facilities. Its capital expenses have added up to $24.6 billion over the last four quarters, surpassing the combined investments of Apple, Tesla, and Nvidia. This high-cost business model typically translates to modest valuation ratios. However, TSMC’s stock is trading at lofty ratios, with a price-to-sales ratio of 12.8, significantly higher than the 2.5 average of the 10 largest industrial stocks.
Robust Business Results Back Up the Valuation
Despite the high price, TSMC’s business results are impressive. After a temporary dip, sales and profits are soaring again. Revenues rose 39% year over year in the third quarter, while net income jumped 54%. Free cash flows nearly tripled, reaching $5.7 billion in U.S. dollars.
Growth-Oriented Metrics Suggest a Fair Price
While the stock may seem expensive, growth-oriented metrics tell a different story. With a forward-looking P/E ratio of 23 times next-year estimates and a price-to-earnings-to-growth ratio (PEG) of 1.1, the current stock price appears reasonable.
A Tempting Investment Opportunity
TSMC offers a unique way to invest in the AI boom without picking a winner in the chip-design battles. As a leading chipmaker, TSMC will likely benefit from the entire AI sector’s success, regardless of who dominates the hardware market. However, investors need to be comfortable with the stock’s growth-based valuation.
A Word of Caution
While TSMC may be a fine growth investment, it’s not suitable for every investor. Those who are uncomfortable with the stock’s valuation may want to consider lower-priced chipmakers or undervalued AI software and services providers instead.
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