TSM stock is a buy on strong catalysts and a reasonable valuation
All signs point to the demand for semiconductors should remain strong in the foreseeable future. During this time, Taiwan semiconductor (NYSE:TSM), one of the biggest names in the industry, recently reported strong fourth quarter results, and TSM’s stock valuation remains quite reasonable.
Another important point is that Taiwan Semiconductor is responding intelligently to the incredible demand for chips by investing huge sums in increasing its chip production capacity. Finally, demand for Taiwan Semiconductor’s advanced chips is expected to be very strong in the long term.
With that in mind, here’s a closer look at why TSM stock is a long-term buy.
TSM Stock: Strong Demand for Chips Expected to Remain
Over the past few weeks, I’ve heard and read the phrase “crisps are the new oil” many times. And that makes sense to me, because semiconductors now power so many of our essential goods – from our cars to our smartphones and televisions.
With the Internet of Things revolution underway and the connected car revolution just beginning, the demand for chips, if any, is expected to increase significantly in the future. The AI boom is another revolution waiting to skyrocket longer-term chip demand. After all, AI is powered by specialists fries.
But these catalysts aren’t the only ones pushing TSM’s stock higher. Its impressive earnings results are also worth noting.
Taiwan Semiconductor Reported Strong Fourth Quarter Results
Unsurprisingly, given the intense demand for chips, Taiwan Semiconductor reported strong fourth-quarter results on Jan. 13.
The company Reported earnings per share in the fourth quarter of $1.15, compared to an average analyst estimate of $1.11. Its revenue jumped 24% year-over-year and was roughly in line with the average outlook. For the first quarter, Taiwan Semiconductor provided revenue guidance of $16.6 billion to $17.2 billion. In the middle of the range, it was above the average estimate of $16.7 billion.
According to Taiwan Semiconductor Vice President and Chief Financial Officer Wendell Huang, “Our business in the fourth quarter was supported by strong demand for our industry-leading 5-nanometer technology.”
Advanced chips and smart investments
Taiwan Semiconductors, which produced 24% of the world’s chips in 2020, manufactures some of the most advanced semiconductors available. Its products, for example, include the most advanced chips in Apples (NASDAQ:AAPL)iPhone. It also manufactures chips that enable AI in vehicles. According to CNBC“[w]When it comes to the most advanced chips used in the latest iPhones, supercomputers and automotive AI, TSMC is responsible for 92% of production.
While the shortage of less advanced chips would be more acute at this point, I’m more optimistic about the prospects for premium chips in the long term. Indeed, these semiconductors power the breakthrough devices that are likely to grow the fastest in the future.
Along with Taiwan Semiconductor’s fourth quarter results, its CEO, CC Wei, announced that its capital expenditure will be $40 billion to $44 billion in fiscal 2022. The company is allocating the large amount of funds in response to the global shortage of semiconductors and to exploit the strong demand for its chips.
As I indicated earlier, I think this decision makes a lot of sense. Given the high demand for Taiwan Semiconductor’s chips and the high probability that it will only accelerate in the months and years to come, the company’s large investments, intended to boost its production of chips, will in all likelihood prove extremely profitable in the long run.
The basics of TSM stocks
In the meantime, the company has many powerful and positive catalysts, both short-term and long-term. As such, I think the stocks are worth buying at their current levels.
As of the date of publication, Larry Ramer had no position (directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.
Larry Ramer has researched and written about US stocks for 14 years. He was employed by The Fly and Israel’s largest business newspaper, Globes. Larry started writing columns for InvestorPlace in 2015. Some of his highly successful contrarian picks include GE, Ford, solar stocks and Exxon. You can reach him on StockTwits at @larryramer.