Taiwan Semi Is up 56% YTD, but Is Still Undervalued

  • Stock Market Analysis

Taiwan Semiconductor Manufacturing (NYSE: TSM ) continues to occupy a peculiar status in the investing world.

On the face of it, the Taiwanese company has the most advanced chip-making foundries in the world. Its cutting-edge N3 node (3 nm) deep ultraviolet lithography (DUV) process is poised to chart new efficiency and performance standards.

By 2030, TSMC’s 1 nm process is the major milestone on the roadmap, which will pack over a trillion transistors with 3D-stacked chipsets. Although Samsung (KS: 005930 ) and Intel (NASDAQ: INTC ) are close behind, Chinese chip makers are not there yet.

Pushed by government subsidies, Chinese Semiconductor Manufacturing International Corporation (SMIC) and Huawei are heading to manufacture 5 nm chips in Shanghai, lagging one generation behind. The US export controls are attempting to keep it that way. At the same time, the USG’s subsidies via the CHIPS Act are pushing Intel to take Samsung’s place behind TSMC.

Concurrently, the US Commerce Secretary Gina Raimondo is openly antagonistic towards China, having noted in March that “we cannot allow China to have access for their military advancement to our most sophisticated technology,”

Later in the 60 Minutes interview, Raimondo admitted that TSMC is the critical cog in the technological suppression of China.

“We have the most sophisticated semiconductors in the world. China doesn’t. We’ve out-innovated China,” boasts Secretary Gina Raimondo.

“Well, ‘we,’ you mean Taiwan?” asks Lesley Stahl. https://t.co/EDaqi9Cj9W pic.twitter.com/Ao31Vx9gQN

— 60 Minutes (@60Minutes) April 21, 2024

This dynamic puts TSMC investors in an awkward position. After all, Taiwan is right next to China, opening the gates wide to uncertainty. China can perform its suppression with blockades or military drills, as they have been occurring most recently since Thursday.

And that uncertainty places TSM stock firmly in the undervaluation range. But by how much?

TSMC Price and Earnings

Year-to-date, TSM shares gained 56% in value. Although impressive and widely outperforming the broad S&P 500 benchmark, Nvidia (NASDAQ: NVDA ) shares gained more than double that at a 116% boost in the same period. At the present price of $158.25 per share, TSM stock is near Thursday’s all-time high of $160.64.

This was when the price began to fall just as Chinese military drills around Taiwan commenced. TSM stock is nearly double its 52-week low point of $84.02 per share. In April, TSMC delivered its earnings for Q1 2024.

Although tracking a quarterly decline of 3.8%, the company reported 12.9% YoY revenue growth to $18.87 billion. The new 3 nm wafer process accounted for 9% of total revenue. The 5 nm process, the cutting edge for China, accounted for 37% of revenue, with the last-gen 7 nm making 19% of the revenue. TSMC reported $7.17 billion net income, an 8.8% YoY improvement. For the second quarter scheduled to be released on July 18th, the company expects further growth at $19.6 – $20.4 billion revenue range.

TSMC Fundamentals Examined

Like Nvidia, TSMC has beat earnings per share estimates for the last four consecutive quarters, showcasing strong fundamentals. However, while Nvidia had an upside surprise of 12.84% in the last quarter, TSMC only had 6.98%. Greater divergence is present in other quarters as well.

Case in point, when Nvidia ended the July 2023 quarter with a 38.89% upside surprise, TSMC ended it with 6.54% for the same period. This placed Nvidia’s price-to-earnings ratio (P/E) nearly three times above TSMC, at 87.67 vs. 30.33 P/E respectively, as the measure of how much investors are willing to pay for the company’s stock to every $1 of its annual earnings.

But given that Nvidia, AMD (NASDAQ: AMD ), and Intel are all reliant on TSMC for its mass-scale manufacturing and cutting-edge node processes, this clearly points to investor displacement of focus. In other words, Taiwan’s location remains a suppressive TSM price driver.

However, as TSMC continues to expand beyond the island into Germany, Japan, and the US, the strength of the suppression is likely to weaken. Under the CHIPS Act alone, TSMC received $11.6 billion in loans and grants to build new foundries in Arizona.

Is China Just Posturing?

It bears noticing that the two economies are deeply intertwined despite tense US-China relations. Although Treasury Secretary Janet Yellen called for a “wall of opposition” to China’s exports, China held $797.7 billion in US Treasuries, or ~10% of the US national debt, in January.

This puts China in a financially subservient position amid threats from US officials. After all, China relies on Treasuries to maintain low export prices. A trade surplus with the US would allow more USD to flow into China, which would appreciate the Chinese yuan and make Chinese exports more expensive.

China has to rely on US Treasuries to hold USD inflows without appreciating the yuan. Otherwise, China’s export-oriented economy would lose global standing due to more pricey exports. Nonetheless, this dynamic doesn’t prevent China from posturing, which has a negative effect on investors.

What Is TSM Stock Price Forecasting?

Based on forecasting data aggregated by Nasdaq, TSM still remains in the “strong buy” zone. Against the present price of $158.25 per share, the average TSM price target is $164.11. The high estimate is $188 while the low forecast is $150 per share.

Similarly, WSJ’s average price target is $162.64 per share. The high target is $182, while the low estimate is $130 per share.

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Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.

This article was originally published on The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.

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