Taiwan Semiconductor Can Gain From Intel’s Challenges

Aug. 30, 2023 10:14 AM ET Taiwan Semiconductor Manufacturing Company Limited (TSM)

Summary

• TSMC has seen some headwinds in the last few weeks which has reduced the bullish sentiment towards the stock.
• The recent termination of the Tower Semiconductor deal by Intel shows that TSM could gain a strong tailwind due to challenges faced by Intel.
• TSM’s FCF management is better than Intel and it is likely that TSM will maintain its process lead over Intel in the near term.
• TSM stock is trading at a 30% discount based on its forward P/E ratio compared to the 5-year median.
• Despite some geopolitical risks, TSM remains a good bet as semiconductor demand improves in the first half of 2024 and it should also gain some good tailwinds due to the AI hype.

The article discusses Taiwan Semiconductor Manufacturing Company Limited (TSMC) and its potential for growth despite recent challenges. Here are the key points from the article:

1. Recent Headwinds: TSMC has faced various challenges in recent times, including declining revenue, geopolitical tensions, and recession fears. These factors have caused the stock to dip below $100.
2. Intel’s Termination of Deal: Intel terminated its deal to acquire Tower Semiconductor, resulting in a $353 million termination fee. This development has improved sentiment toward TSMC and may indicate difficulties in increasing foundry capacity through acquisitions.
3. Process Lead Over Intel: TSMC maintains a strong process lead over Intel. Any missteps or delays in Intel’s process roadmap could benefit TSMC, as the semiconductor industry highly values process technology.
4. Financial Metrics: TSMC’s free cash flow (FCF) management is better than Intel’s, and it has higher cash reserves. Despite reporting negative FCF in the recent quarter, TSMC’s trailing twelve-month FCF is favorable.
5. Discounted Valuation: TSMC’s stock is trading at a 30% discount based on its forward price-to-earnings (P/E) ratio compared to its five-year median. This suggests that the stock may be undervalued.
6. AI Growth Potential: TSMC stands to benefit from the growth in artificial intelligence (AI) chips, which are projected to have a 50% compound annual growth rate (CAGR) over the next five years. TSMC supplies chips to key AI players like Nvidia and AMD.
7. Investor Takeaway: Despite recent challenges and geopolitical risks, TSMC is considered a good investment opportunity. Any missteps by Intel, TSMC’s strong process lead, and its involvement in the growing AI chip market are factors that could drive future growth.

In conclusion, the article suggests that TSMC’s stock may be undervalued given its long-term growth prospects, and it could see improved sentiment and performance in the near term, especially if Intel faces delays or difficulties in its expansion efforts.

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