TSMC stock may be the best investment of the decade

Taiwan Semiconductor Manufacturing Company (TSMC) is the world’s largest semiconductor chip manufacturing company.

ABOUT COMPANY

TSMC manufactures products for major technology companies, including Apple, Qualcomm, Nvidia and AMD. The company releases over 11,000 different products yearly using over 280 other technologies for around 510 customers. Offices are also located in North America, Europe, Japan, China and South Korea; the company employs over 50,000 people.

TSMC is a vivid example of success in the IT world, a product of inevitable globalization; the modern world has become synonymous with phenomenal success. The Taiwanese company has become one of the world’s largest microchip manufacturers. In some segments of this industry, it has generally entered the monopolist position.

Founder

Very often, it is impossible to understand the current state of affairs without paying attention to the historical retrospective of the issue. For example, the form of the contemporary world production of semiconductor products is inextricably linked with such an extraordinary personality as Maurice Chang. The founder and long-term leader of TSMC is an outstanding personality who managed to go from an ethnic Chinese to a US citizen and occupy his new global high-tech niche.

TSMC was founded by Chang in 1987 as a joint venture between Koninklijke Philips, the Taiwan government and private investors and is based in the Hsinchu metropolitan area.

The company managed to become a leader in the industry through continuous investment and expansion of production capabilities with an emphasis on high quality.

In 1993, TSMC built its 8-inch silicon wafer manufacturing plant. In 1993, the company entered the Taiwan Stock Exchange and then the US NYSE.

TSMC CORPORATION

Under the leadership of the non-replaceable leader Maurice Chang (the founder of the corporation retired only in 2018 and has given her 31 years of his life), TSMC has become a landmark not only for Taiwan but for the whole world. However, to understand what TSMC is now, you need to look at just a few facts, the main one of which is the level of profit.

In the contract manufacturers of semiconductor wafers market, TSMC is the undisputed leader with a total share of 60%. As for the particularly advanced direction in producing wafers in the range of 5 – 32-nm (nanometers), here the company satisfied the world demand with its products by 80%. The company’s profit is estimated in billions of USD.

Semiconductor semi-finished product

The company’s business format does not involve releasing its own completed product, whether it be processors, memory modules, SoC, etc. Instead, TSMC has become the world’s largest semiconductor contract manufacturer, hosting orders from companies such as Apple, Qualcomm, Nvidia, AMD, Marvell Broadcom, MediaTek, Huawei, and even the mighty Intel at its facilities. However, its share is not so significant in ready-made solutions.

TSMC is exclusively dedicated to wafer casting and has no complete semiconductor manufacturing cycle, even with deep partnerships with AMD and Apple. At the same time, Intel and Samsung, Texas Instruments and Broadcom have a whole process of developing, producing and selling processors. Meanwhile, in addition to the development of processor architecture, which a sufficient number of organizations are engaged in, the creation of those same semiconductor wafers, and in particular, the equipment on which it will be created, plays a vital role in the chips’ production. With a seemingly sufficient number of enterprises – Applied Materials, ASML, Tokyo Elektron, Lam Research and KLA, there is no need to discuss a wide choice of equipment. The problem with the manufacturers of this equipment is that the most demanded semiconductor products have the maximum number of transistors per square inch. Therefore, in this segment, the competition among companies is very conditional.

The world’s only EUV photolithography facility for producing semiconductor wafers using the 5-nm process technology is manufactured by the Netherlands company ASML. It is this equipment that TSMC uses in making its 5 – 7-nm products and Samsung itself. At the same time, Intel claims that its developments based on equipment from Applied Materials are pretty progressive and make it possible to create transistor density on semiconductor wafers produced using the 7 – 10-nm process technology, similar to the thickness on wafers with 5 – 7-nm, produced by TSMS.  

The state of affairs in the semiconductor sector

The complexity of technological progress in semiconductor products has led to the unification of developers, manufacturers, markets, and marketers worldwide. The principal violin in this globalization process is now naturally played by the United States, as it has always been in the field of microelectronics.

TSMC is the largest semiconductor manufacturer among contract manufacturers, with a market share of 28%. The company does not sell products under its brand but only produces them for third-party manufacturers in the industrial sector. TSMC and UMC have similar business models.

Leaders strive to catch up

• Chinese manufacturer SMIC – 11% of the market;    
• South Korean Samsung Group – 10% of the market;     
• GlobalFoundries – 7% of the market.                                                                                                                                                 

TSMC’s direct competitor is the Samsung Group. Both companies are focusing on 7 – 5-nm chips. In addition, they are in a race to produce 3 -nm chips.

Company business

Taiwanese contract chip and IC manufacturer TSMC is the world’s second-largest semiconductor company by market capitalization, with a no-brand business model that caters to global fabless customers.

Powerful Growth Drivers for TSMC have created a trend for semiconductor companies to shift to a business model without their factories. The movement has made the company the leading manufacturer for all significant chipmakers. TSMC only works towards manufacturing these products for customers and guarantees that it will not implement any other proprietary business components. In other words, TSMC does not manufacture, design or market products but only fulfils orders for the production of chips by customer requirements, using the most advanced technologies at its disposal. It allows the company to avoid competing with its primary customers – giants such as Nvidia Corporation, Apple, AMD, Qualcomm and Huawei Technologies while benefiting from the sector’s growth. With semiconductors in short supply, this business model is considered by many experts to be the best.

No matter what technology is in demand, TSMC will always get its production orders. It is because TSMC’s business covers the whole world and is well diversified.

Product and process

Let’s consider in more detail the structure of earnings of TSM C itself for a specific manufacturing process. First, we can see that the main profit comes from the most advanced industries implemented at the 5 – 7-nm manufacturing process level.

To fully understand the essence of TSMC’s business, you need to understand what kind of product it provides and how much it is in demand. To do this, let’s delve a little into the essence of the production of microcircuits and their application.

The most petite transistor sizes and, accordingly, the most productive at the moment are for processors with a 7 and 5-nm process technology. However, other technical processes are also in demand on the market – from 10 to 65-nm.

Numerical designations in nanometers (nm) are the process by which the transistor is made. The number of nanometers means the minimum length of the transistor channel through which the current passes. The smaller the transistor, the lower the power consumption and the more they can be placed on a processor chip; the higher its performance will be. For example, in the Apple A13 Bionic using TSMC’s 7-nm process technology, the iPhone 11 has 8.5 billion transistors.

TSMC makes money from the development and production of chips that are used in modern devices. 7 – 16-nm chips form the primary revenue of the company. In 2020, the company began to implement new 5-nm chips. But their share in the company’s revenue will grow, as these chips are the most advanced. More than half of the products released by the company are installed in smartphones; a third become the basis for high-performance systems.

Drivers for the development of the semiconductor sector

The primary demand of the sector is formed by technologies from the Networking&Communication category – about 32.4%. It includes all equipment that allows you to transfer information, such as smartphones, computers, TVs, modems, etc. Then there are technologies from the information processing and storage (Data processing), which again include computers, smartphones, game consoles, VR, and so on. In addition, demand from the automotive industry (Automotive) is also growing, and household appliances (Consumer Electronics) are on a par with it.

TSMC’s production structure covers them all. For example, about 48% of revenue comes from the production of integrated circuits (chips) and image sensors for smartphones. Revenues from this area have been growing by more than 20% per year over the past few years.

In second place is the production of integrated circuits for high-performance computers, game consoles, tablets, etc. (HPC) – they account for about 33% of total revenue. Currently, this is the fastest growing segment of the company – more than 35% per year. Such growth was due to several factors: the transition of people to remote work, the development of the gaming industry, the flourishing of mining and the high demand for cloud services.

In third place is the production of integrated circuits for technologies from the Internet of Things (IoT) category, about 10% of revenue. Again, it includes many different devices, but in its presentation, the guide refers to smartwatches, wireless headphones and tracking devices – growth in revenue from this area – is more than 25%.

The auto industry’s share in 2020 fell to only 3%. Although due to the pandemic, the annual drop in revenue from this area was almost 10%. However, in 2021 the situation has improved significantly, and the demand for car chips has grown by nearly 30%. Moreover, there is every reason to believe that this growth will continue as demand from automakers continues to grow.

Directions for the production of integrated circuits for household appliances (DCE) and others are growing very slowly, only 4% per year. Still, this is not critical for the company, given its small revenue share.

In 2021, TSMC accounted for 60% of the global market share in producing 28 – 65-nm products. And the transition to the production of 5 – 10-nm chips has allowed the company to occupy 90% of the market today. As a result, the company’s revenue growth is about 25% per year (about $10 billion).

This “modest” growth was the lack of free production capacity. Due to high demand, the company is operating at the limit of its capabilities, in principle, like all companies in this sector. As a result, in 2020, the loading (output) of TSMC amounted to 100% of all production capacities (capacity), although a year earlier, it was about 75%.

To solve this problem, TSMC announced a $100 billion investment program through 2023, including constructing a plant in Arizona (USA) with a capacity of 240,000 5-nm wafers per year, investments in expanding existing production facilities and research and development costs. However, TSMC reportedly only agreed to build the plant because the US government would subsidize the difference in production costs, which are 8-10% higher in the US than in Taiwan. Moreover, the plant in Arizona will operate on 5-nm technology; when it starts production in 2024, it will already lag behind 3-nm production in southern Taiwan (TSMC does not let go of its advanced technologies).

TSMC Revenue Sources, Structure and Revenue Segments

The company receives all its income from orders for the production of chips for smartphones, high-performance computers, the Internet of things, the automotive industry, consumer electronics, etc. TSMC’s clients are companies such as Apple, Qualcomm, Nvidia, AMD, Broadcom, MediaTek, Huawei and others.

Company’s revenue structure

• 28-nm chips – 13%;
• 17-nm chips – 17%;
• chips 7-nm – 33%;
• chips 5-nm – 8%.

7-nm chips have been in production since 2016 and are used by AMD and Apple. The company’s revenue segments

Half of all chip revenue comes from smartphones. Apple alone accounts for 21%. In terms of platform revenue, the high-performance computing segment comes second – this is the high-performance computing segment. The main customers are GPU manufacturers Nvidia Corporation – 7% and AMD – 6%.

The rest of the details (automotive industry and the Internet of things) do not exceed 10% of revenue.

Market

It is worth noting that in various analytical materials in the semiconductor industry, the market share belongs to other players, such as Intel, Micron, Qualcomm and so on. The fact is that Taiwanese companies produce products under the customer’s name so as not to compete with them. Thus, TSMC makes chips for Apple, AMD and Qualcomm. UMC produces chips for Intel, MediaTek and Realtek. SMIC manufactures chips for Qualcomm, Broadcom and Texas Instruments.

Shares of manufacturers in the global semiconductor market

• TSMC – 28%;
• UMC – 13%;
• SMIC – 11%;
• Samsung – 10%;
• GlobalFoundries – 7%;
• Hua Hong group – 6%;
• Vanguard – 6%;
• PSMC – 6%;
• Tower Semi – 5%;
• Others – 8%.

The semiconductor market is projected to grow by $90.8 billion between 2020 and 2024, with a CAGR of over 4%.  Accordingly, TSMC’s revenue can be expected to succeed long-term.  

This market is a strategic industry for the most significant technological countries, mainly China and the USA. Therefore, it can be strongly influenced by political aspects.

China is the largest electronics manufacturer, accounting for more than half of the semiconductor consumption market. In 2020, China announced it was investing $1.4 trillion in manufacturing, and local companies began poaching key TSMC engineers to overtake the US in chip production.

For the US, semiconductors are also strategically important, including in the military industry. In 2020, as we have already noted, the United States and TSMC agreed to build a plant in Arizona. And the Chinese company Huawei TSMC, which fell under the sanctions, refused to manufacture chips. Moreover, last May, the US announced $52 billion in support and research into semiconductors, showing the government’s interest in the sector.

Assessing those grandiose financial injections carried out in the development and production of semiconductors by Intel, Apple, Samsung, ASML, TSMC, etc., there is no reason to talk about the appearance of a new player even in the medium term. Even “omnipotent” China does not have its entire production cycle of modern semiconductor wafers. The most advanced production of such products in mainland China is SMIC (Semiconductor Manufacturing International Corporation). Still, it is also preparing to start producing wafers using the 7-nm process technology exclusively on ASML equipment. In this light, any failure in the process chain, thanks to the same threatening sanctions, can throw China back in production technologies for decades.

Comparison with competitors

For comparison with TSMC, United Microelectronics, Semiconductor Manufacturing International, Samsung Electronics and Hua Hong Semiconductor were chosen. The revenue growth rate is the primary indicator that shows how successful the company is in its market and whether its services are in demand.

The ratio of return on equity (ROE) is taken into account, which shows the financial return on the use of the company’s capital and allows you to evaluate the quality of work of financial managers.

As a result, the conclusion is obvious – TSMC has occupied a leading position in revenue growth for five years and ROE, confirming its leadership in the industry.

WHY TSMC IS PROBABLY THE MOST IMPORTANT COMPANY FOR THE INDUSTRY IN THE WORLD

TSMC, not without reason, is considered today the largest and most unattainable company in the field of microchips. TSMC is used by Apple, AMD, Qualcomm, Nvidia, automakers and many other companies – and only it can provide them with the necessary components (certain types of boards, processes and microprocessors are only made by them). However, with significant investment in downsizing the operation (transistor size) and increasing manufacturing capacity, TSMC has been left behind by other chip makers. An important characteristic, as already noted, that affects the performance of microcircuits is the number of transistors that can be placed on one chip. The smaller the size of the transistor (smaller process technology), the lower the power consumption and the higher the speed. Reducing the process technology requires more complex developments and significant investments in production. Therefore, chip designers began to devote more time to design over the years, and production was transferred to foundries such as TSMC.

The more expensive the production of chips became, the more companies outsourced it, and the more TSMC’s competitors dropped out of the technology race. At present, one of the “dinosaurs” of the technological race of Intel can no longer cope with this company in the field of process quality and outsources important areas (mainly used in the space industry and the defence industry). For example, only two companies worldwide, TSMC and Samsung, have mastered the most advanced 3-nm process technology. 3-nm chips will be 70% faster than current 5-nm processors. China, by the way, can produce only 45-micron processors on its equipment.

TSMC accounts for 40-65% of the world’s revenue in producing 28 – 65-nm components used in automotive electronics. But in making high-tech 5 – 10-nm chips, TSMC already occupies about 90% of the market.

“Automakers believe they are the world’s giants. But in this situation, the chip manufacturers are giants, and their automotive customers are just ants, “the captains of business” sometimes joke from TSMC.

Billion in growth and manufacturing capacity, up 63% from 2020, and more than planned investment by Intel and Samsung combined. Analysts say that part of the investment may go to fulfil Intel’s orders. The company is forced to partially transfer the microcircuits production to outsourcing to quickly master two technical processes – 10 and 7-nm and keep up with competitors. And the longer, according to experts, Intel will solve its problems, the more significant the gap will be. For now, TSMC remains out of reach.

The Intel team has been working with TSMC for more than a year to launch outsourced manufacturing. Intel plans to order about 20% of processors from TSMC in 2023, and for this alone, the Taiwanese company needs to invest more than $10 billion in separate production lines.

The above makes a strong case that the industry is incredibly dependent on TSMC, especially at the cutting edge of technology – and that’s pretty risky. If 20 years ago there were about 20 chip manufacturers, now the best enterprises are concentrated on one campus in Taiwan. For example, to remain the leader and meet the demand for 3-nm chips in 2022, TSMC is building a new factory with 22 football fields (160,000 m2) in Shanhua, Taiwan.

TSMC also plans to build a plant in Arizona and set up a subsidiary in Japan to research new semiconductor materials. In addition, the European Union is discussing investment in constructing a next-generation plant in Europe – to produce 2-nm chips.

TSMC dominance is not in danger yet

One of the crucial reasons for the company’s global success is that production is concentrated in Taiwan: all the buildings are located nearby, and if necessary, it can quickly mobilize engineers to help each other. Moreover, industrial espionage has not been cancelled, and it is easier to keep your achievements in Taiwan than by opening factories worldwide. For this reason, TSMC began to dominate the market, and its competitors GlobalFoundries (USA) and UMC (Taiwan) gradually abandoned the technology race.

China’s largest chip maker, Semiconductor Manufacturing International Corporation (SMIC), is still investing in growth but was thwarted by US authorities in 2020 with export controls. So now SMIC cannot get the equipment necessary for the construction of factories (the USA produces mainly the equipment, a small part of Europe and Japan, but lower quality).

Only Intel remains in the US, which has announced the construction of two new factories in Arizona and an investment of $20 billion to develop its production. But it will be difficult for Intel to compete with TSMC – it tried several years ago, but could not, although, at that time, they had the best technological processes on the market.

TSMC intends to keep the lead. A significant portion of the planned investment will go to deep ultraviolet (EUV) photolithography machines – essential equipment for advanced production lines – Holland (ASML) 80% and Japan 20% (Nikon and Canon, the latter of much poorer quality.

The Dutch company ASML is the world leader in the EUV market. However, its capacity does not match the demand for equipment. And each order from TSMC, according to experts, will allow it to continue to keep competitors behind. The Dutch only work for TSMC, while the rest stand in line or are content with Nikon and Canon.

TSMC – FINANCE, INVESTMENTS, SHARES

The global revenues of companies selling semiconductor products in 2021 reached $583 billion and grew by 25.1% compared to the previous year.   For the first time, revenues from this market sector exceeded $500 billion.

At the same time, against the backdrop of a global shortage of chips and current market supply problems, the demand for microcircuits began to outstrip supply, which was one of the main reasons for the record profits of prominent industry participants. Furthermore, an increase in the cost of logistics services and raw materials necessary for chip production in 2021 also led to a rise in the average chip price in the market, contributing to the overall growth in the revenue of their manufacturers.  

In 2021, TSMC generated record revenue of NT$1.59 trillion ($57 billion), up 18.5% from 2020. The company’s fourth-quarter net income rose 16.4% year on year. In 2022, the company plans to invest between $40 billion and $44 billion to ramp up its chip production and, as a result, see revenue growth of 25% year-over-year.

TSMC is the most valuable company in Asia

2022 Taiwanese company Semiconductor Manufacturing Company (TSMC) became Asia’s most valuable company for the first time, surpassing China’s Tencent holdings ltd. Market analysts explained that Tencent’s market value fell by a third over the past year due to increased regulatory pressure on technology and IT companies in China and changing customer priorities. They predict that the technological and financial gap between TSMC and its competitors, including Tencent, will continue to widen.

TSMC, on the contrary, against the backdrop of a shortage of components in the semiconductor market, received billions in orders for the production of silicon wafers and was able to show significant financial growth against the backdrop of continued global demand for semiconductor components.

This year, TSMC is investing $44 billion to develop its factories and scale up chip production for its customers. At their production facilities, they fulfil large orders from companies such as Apple, Qualcomm, Nvidia, AMD, Intel, Marvell Broadcom, MediaTek, Huawei and many more. Shared by TSMC, according to the Semiconductor analysts Industry Association, accounts for over 90% of the production of the world’s most complex semiconductor components and microchips.

Investment in manufacturing capacity growth will be 47% compared to 2021 (investment in 2021 was $30 billion) against a global crisis in the semiconductor market due to high demand. As far back as last year, TSMC predicted that chip shortages would affect 2022. TSMC also believes that the lack of semiconductors due to the coronavirus pandemic will continue into 2022. As a result, key chipmakers will have to raise costs, launch new factories and adjust their growth plans.

The Taiwanese chip maker said that the shortage of semiconductors for the automotive industry would begin to decrease in the next quarter of this year. It will allow General Motors and Ford to cushion losses due to suspended factories. Automakers, according to experts, have suffered from the semiconductor crisis more than other industries – in 2021, these companies will lose more than $60 billion.

Despite the optimistic forecasts, the shortage of microcircuits will last the entire year and capture the next one. To speed up the recovery from the crisis, TSMC invested about $30 billion to modernize its production facilities.

Nvidia also agrees with the forecasts of Taiwanese colleagues. The corporation noted that the demand for chips continues to exceed supply, and its stocks are still much less than necessary. This situation is expected to continue until the end of the year.

Intel assesses the situation more pessimistically. According to its management, the shortage of microcircuits will continue after 2022. Now the problem with the availability of microcircuits can either improve or worsen, but to finally correct the situation, and new factories are needed. Intel has begun talks to make chips for the automotive industry to reduce shortages and turn the tide on car factory downtime.

In terms of current market capitalization, TSMC ($637 billion) is already ahead of Tencent, Nvidia, Intel, Samsung, Texas Instruments, AMD and many other companies in the world, except for the eight most expensive: Apple, Microsoft, Saudi Aramco, Alphabet, Amazon, Tesla, Facebook and Berkshire Hathaway.

1	Apple	APPL	$2.558.997.803.500
2	Microsoft	MSFT	$2.166.277.597.507
3	Saudi Aramco	2222-AB	$1.935.661.200.000
4	Alphabet A	GOOGL	$1.719.865.624.924
5	Amazon	AMZN	$142.361.4084.102
6	Tesla	TESLA	$920.840.570.744
7	Bitcoin	BTC	$906.590.676.171
8	Facebook	FB	$860.523.848.594
9	Berkshire Hathaway B	BRK.B	$672.268.240.385
10	Taiwan Semiconductor	TSM	$637.731.777.033
11	Tencent	TCEHY	$568.843.876.310
12	NVIDIA	NVDA	$561.970.920.000

Should you buy TSMC shares?

How stable is TSMC, the grey cardinal in the semiconductor market? How attractive are its shares to buy?

Experts recommend ADS TSM buy with a target price of $140.00 for January 2023 and 15.36% potential excluding dividends.

Despite TSMC’s global logistical challenges, a steady improvement in financial metrics began to be recorded in 2021 and continues into the current year. Structural growth in long-term demand also continues, supported by key industry trends. In addition, due to the stabilization of the situation with the pandemic, TSMC shares have become even more attractive.

They currently trade at a 15.36% discount to peers on forwarding P/E and EV/EBITDA multiples. While TSM’s ADS have lagged behind Taiwan Weighted and NASDAQ dollar performance since early 2021, a spread of more than 10% looks unreasonable given the results and the company’s current position.

Description of the issuer

The main feature of TSMC business

• the company operates in a single segment – foundry production, which includes manufacturing, testing, “packaging”, and automated design of integrated circuits and other semiconductor products;
• does not produce products under its brand;
• it only serves global fabless customers.

TSMC is one of those companies without which it is impossible to implement the innovations of the leading players in the technology sector and the current trends in the industry. In recent years, the company has shown almost absolute leadership in technological processes for the production of chips, and the soaring demand for semiconductors opens up new prospects for it.

TSMC ‘s two biggest buyers, for example. Still, 2020 brought 25% and 12% of annual revenue: the name of the company’s leading client is not indicated in the latest reports (Customer A), but with a high degree of certainty, it can assume that this is Apple. TSMC ‘s products are used in numerous end markets, including but not limited to high-performance computing, automotive electronics, mobile devices and the Internet of Things (IoT). The company’s manufacturing facilities consist of 4 GIFAFAB 12-inch wafer factories, 48-inch wafer factories, and 16-inch wafer factories (all located in Taiwan), plus three more factories under wholly owned subsidiaries of TSMC. Nanjing company, ltd. (Taiwan), WaferTech (USA) and TSMC China company, ltd. (China). TSMC provides customer service through its offices in North America, Europe, Japan, China and South Korea. In addition, factories in the US and Japan have been announced.

The company’s share capital as of October 2021 consisted of 28,050 million shares of common stock traded on the Taiwan Stock Exchange (TWSE) under ticker 2330 and the New York Stock Exchange (NYSE) under ticker TSM. One ADS (American Depository Share) on the NYSE is equivalent to 5 shares of common stock on the TWSE. The number of freely traded shares was 25,930 million, and another 2,120 were owned by the company (treasury shares). The leading shareholder of TSMC is the National Taiwan Development Fund (6.38%, or 1,653.71 million shares). The top five owners are Capital World Investors (3.96 %), Capital Research Global Investors (3.06%), Vanguard (2.54%) and GIC Private (2.42%). The free float is 93.62 %.

Company financial performance

Over the past six years, the profit structure of TSMC has not changed significantly. The most advanced technologies bring about 50% of earnings. This distribution of profits shows that the intensive implementation of advanced technologies makes TSMC a leader among contract manufacturers of semiconductor products. An analysis of TSMC’s statistical reporting, in particular, the distribution of profits by specific regions of the world, showed that in 2020, 75% of the company’s revenue came from the North American market; 6% of its income – from the Chinese market (a sharp drop from 20% as a result of US sanctions). An analysis of the geography of all deliveries of products confirmed that TSMC is entirely dependent on consumers in the United States and its international partners.

TSMC’s main sales growth driver is strong demand for 5 and 7-nm products. TSMC shows a steady increase in financial metrics, despite “short-term imbalances” due to disruptions in supply chains and a structural increase in long-term demand, supported by critical trends in the technology industry, which is common to all of the company’s products.

Financial Results for the first quarter of 2022

TSMC’s released Q1 2022 financial report shows that TSMC’s Q1 consolidated revenue was approximately $16.962 billion.

Net income after tax per share was $269,669,111.00, which is in line with market expectations.

According to the same period in 2021, revenue in the first quarter of 2022 increased by 35.5% compared to TSMC statistics. Compared to the previous quarter, revenue in the first quarter of 2022 increased by 12.1%.

In the first quarter of 2022, the gross margin was 55.6%, the operating margin was 45.6%, and the net income after tax was 41.3%.

5-nm process shipments accounted for 20% of TSMC’s wafer sales in the first quarter of 2022, and 7-nm process shipments accounted for 30% of wafer sales for the quarter. Overall, advanced process revenue (including 7-nm and above) accounted for 50% of wafer sales for the entire quarter.

In terms of platforms, HPC platforms accounted for 41% of revenue, smartphone platforms 40%, IoT platforms 8%, automobiles 3%, digital consumer electronics platforms 3%, and other platforms another 3%.

The price of one 5-nm wafer is $17,000. Taking into account inflation, by 2024, its price may rise to $19.3 thousand, which, using all the production capacities of the plant in Arizona (240 plates per year), will bring the company an additional revenue of $4.6 billion, + 10% to the payment of 2020.

If we summarize this result with other investments, the picture is as follows:

Revenue from 2020 to 2023 will grow by an average of 15%, mainly due to the expansion of production capacity and a shift in the revenue structure towards more expensive wafers. Therefore, we should not expect any super results during this period, although the opening of 3-nm production in 2022 may improve the picture.

In 2024, revenue will increase by another 21% to $89 billion after the plant construction, and net profit with a margin of 35% will be $32 billion.

With an average industry P/E of 29, the stock would have an upside potential of 69%, from $118 to $200 per share. Recall that the P/E ratio (Price/Earnings) is one of the most popular investment multipliers, which shows how undervalued or overvalued a company’s shares are for an investor. But that’s not all. For example, there is information that the US government wants to force TSMC to build about five more factories in the US to ensure the security and sustainable development of the country’s economy. TSMC management does not comment on this but does not deny anything either. Not so long ago, US President Biden secured $53 billion for the development of this industry, which, in our opinion, shows the government’s vital interest in this sector. Therefore, it can extend the forecast to 6 years, assuming it will build five more factories of the same capacity as Arizona’s. Their impact on revenue growth is almost threefold – to $185 billion in 2030. The forecast price, in this case, will be $411 per share, +246% of current prices.

The second part of the forecast is quite conservative. The capacities of the new factories may be many times higher than the forecasts, and this can be seen from the comparison of Fab 18 and Arizona (Foto2.). Moreover, some of them can be oriented for producing three and 1-nm wafers, which are much more expensive than 5-nm ones. So 3-nm wafers can cost over $30,000 a piece, and 1-nm wafers can cost over $48,000. Introducing these products into mass production would boost the share price up to $1000, but so far, this is just speculation based on unconfirmed information and assumptions.

In any case, one cannot deny such an outcome of events, the world is now in a shortage of semiconductors, and with the development of technology, the demand for them will only increase. Moreover, TSMC has the largest production capacity and the most advanced technology. Already, the company is many years ahead of its competitors, so no one “threatens” it in the next decade. In addition, the company has the most expensive investment program in the world – $100 billion, while the closest competitors, Intel and Samsung, have only $20 and $45 billion, respectively.

You should consider adding TSMC shares to your investment portfolio based on this information alone.

Dividends and multipliers

TSMC has been paying dividends since 2004; since 2019, it has switched to quarterly payments. The dividend yield for 2020 was 1.58%. The share of dividend payout from net profit is 51.93%, which gives the potential to increase dividends in the future. The average yield over the five years was 2.91%, while the dividend growth rate was 12.84%. That’s pretty good for a growing company.

Most TSMC multipliers indicate that shares are overbought compared to peers, which does not allow considering the company for purchases at current levels.

Grade

The price of the company’s shares is undoubtedly based on the current perception of a shortage of semiconductors, as well as the realization that the company is operating at its limit and cannot sharply increase production by another 10-20%, i.e. there is a bottleneck effect. And the price has cooled off a little after the highs reached in February this year. However, since then, as you know, delays in deliveries have only grown, so the security price is likely to go higher after a pause. Nevertheless, considering all the above factors, the current price looks quite adequate – the maximum purchase price is $120.

To analyze the value of TSMC shares, we used a valuation by multiples relative to peers, which implies a target capitalization of TWD 17,980.6 billion ($140 on ADS), which corresponds to a potential of 15.36% excluding dividends. The total return, including NTM dividends, is 17.2%. Based on this, ADS TSM has been assigned a Buy recommendation.

Risks of investing in TSMC

Line load and chip delivery issues remain critical risks for TSMC. It is predicted that the situation will normalize after the 2nd quarter of 2022, allowing the company to use its capacities as efficiently as possible. However, today’s capital investment opens up new opportunities for TSMC to compete with Intel and Samsung for US federal subsidies, for example. Negative net debt and credit spread of only 114 b.p. etc., will contribute only a slight increase in the debt burden in the event of an increase in interest rates in 2022.

It must understand that investing in TSMC also comes with certain risks:

– Competition with Samsung Group. So far, TSMC is winning by being one step ahead of the product development and performance competition. But the Samsung Group, by increasing investments, is constantly closing the gap, which may eventually lead to the loss of TSMC’s market share;

– Intel. If the company starts making third-party chips, TSMC stock could correct significantly. The likelihood of such a move by the new CEO of Intel is high. In this case, TSMC risks losing market share in producing 10- nm and more chips. Despite the race to reduce manufacturing processes, the market capacity for such devices remains high;

– Deepening vertical integration. Apple has already abandoned Intel processors in favour of its developments. While designing chips is not the same as making them industrially, at some point, companies may start developing their manufacturing to cut costs. But time plays on the side of TSMC – the further, the more expensive it will be to build a new factory to produce microchips. Therefore, if the giants of the industry ever take up their capacities, then this will be a very long and costly process, and investors will know about this in advance;

– Limited production growth soon. TSMC plants are loaded to the maximum, and it will not be possible to increase capacity, as mentioned earlier, quickly. Therefore, even though orders are planned, it is difficult to squeeze even more money out of this process – only by prioritizing the production of more technologically advanced 5 – 7-nm chips. Thus, “easy” growth of output will be difficult;

– Possible formation of a demand dip after a shortage. It happens almost always; if a substantial deficit is formed, the situation turns 180 ^{degrees over} time. Such a moment for the industry could come as pandemic demand cools and new capacity is added. After that, the market will correct itself;

– Political. Political risks are also rather significant. The US and China are willing to tolerate TSMC’s global market dominance due to the semiconductor shortage. Still, future sanctions, antitrust investigations, and even a confrontation or crisis can hit the company’s value. Currently, the company is relatively expensive compared to its competitors, so there is room for improvement.

Results

Despite the efforts of Intel and Samsung, TSMC still has a significant market share in terms of both silicon pad equivalent and technological advancement. Therefore, there remains only a very distant risk that the companies that are higher in the world ranking will actively begin to move towards creating their productions, but this process is not fast at all, and there is no such trend yet.

TSMC is a company with solid business performance and steadily growing financial performance. The semiconductor market is a promising market that is increasing due to the development of automotive industry technologies, the introduction of 5G, and the Internet of things. Therefore, it will ensure TSMC’s revenue growth in the coming years.

Investors may also consider investing in semiconductor growth through an ETF, such as the iShares PHLX SOX Semiconductor Sector Index ETF.

Company outlook

The technological processes used by TSMC are among the most advanced on the market. In the 2nd quarter of 2020, the company began manufacturing chips using 5-nm technology. That being said, several TSMC customers have already announced products based on the 4-nm process. These will be the Density 9000 chipsets from Mediatek, smartphones expected to hit the market in the 1st-2nd quarters of 2022, and the Snapdragon 895+ processors from Qualcomm and next-generation processors from Apple that will power the iPhone. Thanks to these achievements, the company controls about 24% of the entire chip market (excluding memory), being a vital element of the technology giants’ semiconductor manufacturing ecosystem.

TSMC to move to 3nm mass production in 2022

According to Citigroup and Morgan Stanley, TSMC will begin mass production of 3-nm semiconductors in the second half of 2022. Currently, the company is building new factories in Taiwan to provide the necessary load for customers.

Investment banks also share the forecast for mass production of 3-nm semiconductors. Morgan Stanley believes that TSMC management does not need to fear a repeat of the revenue decline in the second half of 2021, as this is due to higher costs for the production of new chips. At the same time, 3-nm chips are in development and are expected to be released in the second half of 2022. If further development goes according to plan, TSMC will be the first company to adapt 3-nm processes for commercial production.

N3 technology will provide up to 70% increase in logic density, up to 15% increase in speed at the same power, and up to 30% reduction in power consumption at the same rate as N5 technology. At the moment, 5-nm chips are manufactured only by TSMC and Samsung. However, according to the latest data, Intel will launch its processors based on the 5nm process in late 2022 or early 2023. 

TSMC, even if it becomes the sole leader in terms of adapted technical processes, will not stop there. According to management, the company’s focus is gradually stabilizing on the most innovative technologies (5 and 7-nm ), and in the medium term (2025), TSMC expects to start commercial production using 2-nm resolution. As a result, analysts predict the share of R&D in the range of 7-8% of total revenue in the next two years.

TSMC is committed not only to the quantitative expansion of production capacity but also to geographical diversification. Strong global demand for semiconductors has forced TSMC to ramp up expansion plans in several regions. The latest wake-up call was the rumours that Qualcomm, in the conditions of the maximum workload of TSMC factories, will divide the production of Snapdragon 895 between Samsung and TSMC. In early June, TSMC began construction on Arizona’s $12 billion 5-nm facilities. The facility will be a milestone as it will allow the company to compete with Intel and Samsung for a portion of US federal subsidies currently totalling $54 billion. Another important project of TSMC is a joint plant with Sony in Japan. In early November last year, the companies announced the establishment of Japan Advanced Semiconductor Manufacturing, which will manage the construction of a 22/28-nm chip manufacturing facility in Kumamoto. The factory’s launch is also expected in 2024, with construction starting in 2022.

Total capital expenditure in 2021 was projected by management at $ 30bn (TWD 840bn, or 53% of expected 2021 revenue). At the same time, the company itself plans for 2021-2023. will spend about $100bn (or TWD 2,811bn) on CAPEX. Under this scenario, TSMC will, on average, allocate 50% of all 2021-2023 earned revenue. For capital investments. However, the joint project with Sony is not included in the previously announced $100 billion figure, which makes the expected expansion of TSMC even more impressive. After 2023, the intensity of capital investment is likely to decrease to 35–40% of revenue: demand should stabilize at that point, and the company will concentrate only on innovative factories with a planned adaptation of 2-nm processes.

Main conclusions

1. TSMC is the most technologically advanced company among its competitors. In terms of manufacturability, only Samsung is more or less close, but its market share is already significantly less than TSMC – only 18%. And the trend in favour of TSMC and Samsung is likely to continue. Other companies are beginning to fall far behind in technological leadership. Therefore, we should expect an increase in the total share of leaders and the preservation of shares relative to each other.

2. The company’s market share will likely continue growing as the technological race for the number of transistors from customers continues. TSMC has the most advanced ASML equipment and manufacturing process at the moment. Already, the company dominates the sub-10 -nm chip market with a 90% share.

3. Another strength of TSMC is its financial performance:

• gross margin over 50%;
• negative net debt;
• since the production is almost completely automated and the company does not need marketing, the share of SGA expenses is only 3-4% of gross profit and R&D expenses – 12% (central part of the production equipment the company buys on the side, and itself is mainly engaged in production processes) – and it is the most interesting.

These low costs result in TSMC having one of the highest net income margins in the industry at 38%. Higher only sometimes rises at Texas Instruments. 

4. It is impossible not to consider the current tension between the two largest economies in the world and not to consider this factor. Mutual partnership with the USA is essential for the company. 75% of TSMC’s revenue comes from the North American market, and US companies must manufacture chips. China now accounts for only 6% – the company reduced loyalty to China in 2020. Such an exposition allows us to hope that no matter what the contradictions between the US and China are, TSMC will not be affected.

5. TSMC has the most advanced technologies at its disposal, several years ahead of the competition. The company will allocate $100 billion to address the global deficit, which is more than all major competitors combined. This amount will significantly expand production capacity and increase market share by 2024.

However, the high demand for semiconductors is likely to continue beyond this period, which is why the US government is pushing to construct five more plants on US soil. Such extensive growth can increase the value of the company’s shares by ten times or more by 2030. But since this information is unconfirmed and we do not have any specific figures for calculation, in our final forecast, we set the target based on the plan for 2024, $200 per share.

At the same time, it should also understand that the idea of a tenfold increase in the value of shares is based on the assumption that the demand for semiconductors will constantly grow with the development of technology. In particular, it will increase to the most advanced microcircuits, which TSMC specializes in. How great can the need for the newest be seen from the company’s revenue? In 2018, it launched 7-nm manufacturing, the most advanced at the time. A year later, it ultimately killed the demand for 10-nm semiconductors and forced TSMC to restructure production. The company worked out in the end since 7-nm wafers are 57% more expensive.

Final assessment for the investor

TSMC looks resilient. In terms of finances, it has:

• a strong cash position;
• high marginality;
• stable cash flow.

Thanks to this, it constantly increases investments in further development and creates the most advanced products.

TSMC’s business is diversified across segments. The company will continue to develop and traditionally benefit from the following areas:

• development of the automotive industry;
• growth of penetration of a 5G technology;
• Internet of things.

Given its leadership position in the market, contacts with Apple, AMD, and Nvidia Corporation are not in danger for her.

The semiconductor sector is an up-and-coming area. It is considered one of the critical indicators reflecting the dynamics of industrial growth worldwide. Taiwan Semiconductor Manufacturing Company has excellent financial performance and low debt. It occupies a leading position in the industry and provides, in many ways, unique production technologies that competitors have not yet reached. In addition, the current market situation, high demand potential and shortage of chips are a big plus for the company. However, now the company looks very expensive.

Double-digit growth is expected in almost all company activities in the coming years. Based on these forecasts, TSMC looks like the No. 1 long-term buy candidate on any significant correction.

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