Summary
In 2022, Taiwan Semiconductor Manufacturing Company Limited (TSMC) experienced a drop in share price, which opens the possibility of it being underestimated. According to the calculations, the actual worth of the stock could be higher than what it is currently selling for. TSMC has displayed stable financial performance and progressive expansion in the previous years, but are now facing a new giant that challenges it. Furthermore, the ongoing tension between Taiwan and China introduces additional risk that could impact the company's stock value and operations.
Introduction
The dip in the stock price opens up the possibility of it becoming undervalued, presenting an attractive opportunity for value investors to consider.
But before we go and look at the numbers, it’s important to understand what this company is all about:
TSMC is a global powerhouse by being the largest company in the semiconductor industry and as well as one of the largest corporations in Taiwan. Designing and manufacturing cutting-edge integrated circuits and other semiconductor devices. Their influence goes far beyond just one region, as they supply to customers worldwide and well known companies like Apple and Nvidia.
Analysis
Valuation Insights
We will use multiple valuation models to value calculate the intrinsic value. The intrinsic value is the “true value” of a stock, and tells us what it should be priced at.
We’ll use four different models, each with their own unique approach: Graham's Valuation method ($281.05) takes inspiration from the popular investor Benjamin Graham, while Discounted Cash Flow Valuation ($225.67) predicts the value of an investment based of its future cash flows. Next, The Multiples Valuation ($154.60), a technique that valuates the company based on the multiples of similar companies, and lastly the Dividend Discount Model Valuation ($166.08) that considers a stock's future dividends in estimating its worth.
When we divide the alle the number we get an average stock price at $206.86 and a median at $195.87, which we'll compare to the price (at the time this was written) at $83.61. This results in a difference of 59.61% that tells us that the company may be selling at considerably lower price than what it should.
Financial Performance and Growth
Now let us explore the company’s performance and financial health. Keep in mind that it would be best to compare TSMC to Chinese or Taiwanese industries because it’s the business is Chinese or Taiwanese (depending on your standpoint) as well, but because of lack of data, we’ll compare it to US industries instead.
TSMC has shown consistent long-term earnings growth over the past 10 years, with a remarkable 488.86% increase. The company's Return on Equity (37.8%) and Return on Assets (22.1%) are both higher than the US Semiconductors industry averages, indicating a highly efficient company at generating returns. Furthermore, TSMC's earnings growth rate of 22.74% per year outpaces both the US Semiconductors industry average (17.22%) and the US market average (19.08%). Importantly, the company's earnings growth is accelerating, with its growth over the last year (51.25%) exceeding its 5-year compound annual rate (22.74%).
A New Rival
An important reason for the decline in TSMC's stock price in 2022 could be the competition from Samsung Electronics. Samsung has started producing 3nm chips ahead of TSMC, boasting 45% more power efficiency, 23% higher performance, and 16% smaller surface area compared to its previous 5nm process. This development is significant, as TSMC's 3nm process wasn't expected to go into mass production until the second half of 2022. The announcement highlights Samsung's efforts to compete with TSMC, which dominates the market for contract chip production and manufactures Apple's chips for its various devices.
Taiwan x China
The ongoing tension between Taiwan and China has far-reaching implications for firms like TSMC who operate out of Taiwan. With its massive size and market influence; any deterioration of political or military climate could lead to consequences such as restricted trade access, logistical disruptions as well as detrimental impacts on operational proficiency for this valuable firm. Because of this, TSMC remains vulnerable to any future escalations.
Conclusion
The analysis revealed that the stock appears to be undervalued based on it’ intrinsic value. Despite robust financial progress and expansion, TSMC encounters competition from Samsung Electronics in the pursuit of 3nm chip production. Furthermore, the ongoing geopolitical strains between Taiwan and China apprehensively influence TSMC's stock value and activities, which heightens the risk. That’s why it is important to monitor the competitive environment, political relations between Taiwan and China, it’s probable effects on TSMC's growth and stocks.