Our Analysis of Taiwan Semiconductor Manufacturing Company, Ltd. (TSM)

The stock market saw big news last week as Taiwan Semiconductor Manufacturing Company, Ltd. (NYSE ADR: TSM) became a new member of the "$ 1 TRILLION" market capitalization club.

Until the last few years, not many US investors have been familiar with the company.

TSMC (as it is known) is the largest dedicated independent semiconductor “foundry.” That is a fancy technology word for “factory.” TSMC owns factories that make more semiconductors than any other company on Earth by a large amount.

Historically, semiconductors were manufactured by the companies that designed them, like Intel Corporation (NASDAQ: INTC). In 1987, though, TSMC founder Morris Chang decided that it would make sense to build factories and other companies' chips.

This is similar to what happened in clothing. Taiwan and China built factories to make apparel without designing it. They left that to Ralph Lauren or Tommy Hilfiger. This is the chip version of that same situation, with NVIDIA Corporation (NASDAQ: NVDA) taking the place of the fashion designer!

The TSMC model has proven superior to the traditional integrated model. Its focus on manufacturing has allowed it to achieve economies of scale and technology breakthroughs that other companies have not seen.

This leading technological position, along with the explosive growth in semiconductors, has propelled the stock into the $1 trillion club in the last few years.

Today we analyze the company using our “Quantamental” approach.

This is an analysis process that we have developed over the last three decades. It is a quick way to analyze a stock's potential.

This is a reminder that our "Quantamental" analysis is not a formal stock recommendation but rather a quick analytical tool that gives an initial view on the stock in the short and intermediate term.

Here is the analysis…

1. Technical Analysis

TSM has been in the United States since 1987 and trades as an "American Depository Receipt" or "ADR." These shares listed on the New York Stock Exchange represent exposure to the equity of TSMC, which is listed in Taiwan.

Here is the chart since the IPO…

You can see that the company has been a great stock. It has gone from less than $4 a share to a closing high last week of over $205 per share—up more than fifty-fold!

The stock has had an excellent run in the last few years. Here is the chart over the last ten years…

The stock is up three-fold since the stock market bottomed back in early 2023.

It clearly benefits from the bullish view on semiconductors and is in a well-established uptrend. This stock is a clear winner.

Here is the recent stock price and RSI chart…

The stock broke to new highs last week, pushing it into the $1 trillion club. It has now doubled in 2024.

Again, this stock is in a clear uptrend.

Our biggest concern with the stock is that it is currently quite overbought. The RSI reached 74 on the day of the earnings report.

The table shows how the stock performed historically after it breached that level…

The recent overbought levels are a good sign for the intermediate term (months) but usually a bad sign for the short term (weeks).

If you wanted to own the stock but didn't have a position, we would start a small one. Otherwise, we would be patient and wait for a pullback in the stock.

The technical setup is very constructive, but stocks this overbought almost always consolidate. They usually do NOT do this by trading sideways. We think patience makes sense here.

TECHNICAL ANALYSIS = AVOID.

2. Earnings Revisions

Our readers know that we think the strongest driver of near-term stock price performance is whether companies beat numbers and see positive earnings revisions.

We refer to them as “earnings” revisions, but they can also be revenue revisions. We usually look at not only the most popular measure—earnings per share (EPS)—but also other measures, such as Earnings Before Interest, Depreciation, and Amortization (EBITDA).

Since TSM is listed in Taiwan, we don't have the normal access to the earnings revision data that we usually have. However, we do have this chart from Bloomberg…

This is only for the quarter, but the annual data matches the path of this data. The company has been seeing consistent upward revisions in earnings estimates, which explains the recent strength in the stock.

These positive revisions shouldn't be surprising, considering the growth in the semiconductor sector.

Remember that TSMC is a leading manufacturer for the sector globally, with over 60% market share in the foundry market and analysts believing they have over 90% market share in the most advanced chips.

Although the sector has areas of weakness (like PCs), the explosive growth in chips related to artificial intelligence (AI) is driving its results.

As long as this growth remains strong, we think TSMC's positive earnings revisions are likely to continue.

With the positive tailwinds for their operations, we have also seen a good history of the company beating quarterly analysts’ expectations.

Here is that table…

The company has a tremendous track record of meeting – and beating – estimates. 

With their dominant market share, technology advantages, and the strong fundamentals behind the global semiconductor business, we think these trends are likely to continue.

On this basis, we think the stock is a buy.

EARNINGS REVISIONS = BUY

3. Earnings Growth

The final measure we focus on is the actual growth in earnings.

Our most important rule in stock picking is that if a company is earning $1 per share and eventually earns $10 per share, the stock goes up—A LOT.

It may happen now, or it may happen later. It may go up more or less than the level of growth in EPS. It always, however, goes up!

Here is the table for the EPS results of TSM over the last ten years…

Over this period, the company has grown its earnings fourfold. This is a strong performance.

One thing you will notice is that the company is not immune to having a down year. This is a reminder that the global semiconductor industry is a cyclical one.

It goes through periods of tremendous growth but sometimes has to digest that growth.

This differs from many of the other members of the $1 trillion club we analyzed. Most of them have NOT seen multiple-down earnings results in the last decade.

This is also something to consider when considering NVDA and what drives our long-term concern about the stock. We have a similar concern for TSM.

We think the next few quarters should show strong growth, but eventually, the sector's cyclicality will emerge again. As a result, though, we remain constructive on earnings growth in a relevant time frame.

Based on that growth, we think the stock is attractive.

EARNINGS GROWTH – BUY

Conclusion

TSM has an impressive track record of growth.

It is also one of the best (the best?) ways to play the growth in the global semiconductor industry. They dominate the most advanced technologies, and we don't think that will change anytime soon.

We believe they deserve to be in the $1 trillion market capitalization club and have the potential to join the $2 trillion club!

Despite our optimism, we don't like to buy stocks at very overbought levels. We prefer to let them pull back and find a more attractive entry point.

Right now, with the stock at very steep overbought levels, we would hold off entering a position, but we do think the stock can/will be higher in the coming months and years.