Taiwan Semiconductor (TSM)

By October 12, 2017 No Comments

In this week’s content analysis, we’ll be discussing Taiwan Semiconductor (NYSE: TSM) Download . The company is the largest dedicated chip producer (with around 54.5% of market share ) with a market value of $194B , in front of its main competitors such as Intel (INTC) and NVIDIA (NVDA). Its high-quality technology products allow the firm to generate solid operating margins of around 40%. The company is most commonly known for the fabrication of the Apple “A Chip” which can be found on all iPhone devices. Taiwan Semiconductor is currently manufacturing the A11 Chip, the newest model, for the iPhone 8, iPhone 8 Plus and iPhone X. The company also holds within its client roster (around 450 in total) some of the world’s most powerful semiconductor companies such as Qualcomm Inc., Nvidia Corp., Media Tek Inc., among others. Given its high level of client diversification, TSM sets itself apart from its competitors.

Recently, the CEO and founder of the company Morris Chang announced his plans to retire from his position as CEO in Jun ’18. Long time Co-CEO of TSM, C.C. Wei, is now to become the sole CEO of the company. Such news could have caused slight uncertainty within the market, however, the stock price on the day the news release increased by 1.85%. This shows how confident are Investors and Clients about the management’s capacity to remain on the strong growth path it’s been for the last couple of years. TSM’s stock has gained 22.3% YTD and has more than doubled in price since Feb ‘14.

Now, taking a deeper insight into the fundamentals, we can see the Intrinsic Value (IV) of the company has presented a bullish tendency over the last 5 years and currently sits at $39.56. Over the last 12 months, TSM’s intrinsic value grew by 32.54%. The stock is currently trading at a slight premium, the P/IV ratio being at 1.02. Even though this multiple doesn’t seem very attractive, it could represent a nice opportunity given how quickly and regularly the intrinsic value has grown in the past.

The return on capital currently stands at 24.5%, which is high. Even more impressive is the fact that it has been extremely stable over the past 5 years, hovering between 23% and 28%. And, there is no sign of slowing down: since 2013, the invested capital has grown at an average rate of 15% per year, and last year’s growth was the highest, at 16.4%. These capital investments have paid off quickly: over the same period, the NOPAT has grown at an average rate of 18% per year, which is even higher than the invested capital growth itself.

Given this very high economic performance and stability, the current Future Growth Value (FGV) premium of 35% seems reasonable: The Current Operating Value (COV) increased by 34.96% in the last 12 months. Therefore, the current premium reflects expectations of the equivalent of +/- 1 year of growth at the same growth rate.

TSM’s total Economic Value Added (EVA) is currently at an all-time high, at $7.8B, and it has grown very linearly in the past 5 years with no large and sudden increase/decrease whatsoever.

From a pure accounting performance perspective, revenues and earnings growth for TSM have also remained strong during the last 5 years. Earnings have grown 82.3% since Jun ‘13 with a yearly average growth rate of 18.58%. On the other hand, revenues increased by 20% over the last 12 months, and the average revenue growth rate has been of 14% during the last 5 years. This was partly due to the high demand of mobile devices, more specifically the iPhone 7. During the 2016 Fiscal Year, Apple sold around 211.88 million devices  from which TSM received around $10 USD per device sold.  The current dividend yield is attractive at 2.95%, and the 5-year average dividend growth rate has been of 30% per year. As a bonus, the current P/E multiple is only of 17.5, way better than the average S&P500 P/E of 25.

In Summary:

– Taiwan Semiconductor is the leader in its industry.

– Analysts project a 11.8% earnings growth in the upcoming year.

– The dividend yield is currently of 2.95%, and the company should continue to increase the dividend in the coming years.

– TSM’s revenue growth and strength is somewhat correlated to the iPhone demand. The newest device release will set the tone for the company’s short-term revenue growth. Apple as a customer for TSM, represents around 10% – 12% of the total yearly sales for the company.

The semiconductor industry is evolving with new industries such as Artificial Intelligence, driverless cars and big data taking a lot of attention. TSM seeks to adapt and penetrate these new industries, given that the smartphone industry hasn’t presented any noteworthy innovations during the last couple of years. Even though smartphone sales continue growing, the growth rates are much smaller: a total of 1.5 billion smartphone devices were sold in 2016, which represents a 5% increase compared to 2015. The growth rate was of 14% in 2015 and 28% in 2014. It is clear that there is a slowdown, and the general consensus is that the smartphone industry has matured. It now seems to be that not only TSM, but the entire industry is focusing on “the next big thing”. We believe Taiwan Semiconductor is bound to benefit from the demand of chips related to AI, which require sophisticated computing. This is what TSM does best.

Blog post written by Diego Sanchez (intern), under supervision of Jean-Didier L.

Here is a more detailed comparative analysis of Taiwan Semiconductor and its peers, where for each indicator “1” = First relative position and “6” = Last relative position.