Taiwan Semi is a no-brainer right now, this investor says

Fresh off a great-looking quarterly report, Taiwan Semiconductor Manufacturing (Taiwan Semiconductor Manufacturing Stock Quote, Charts, News, Analysts, Financials NYSE:TSM) has now started the new year off with a 17 per cent uptick. But investors wanting to climb aboard shouldn’t worry, says portfolio manager David Fingold, since even as TSMC is hitting new highs, the stock is a great way to play the global chip shortage.

“TSM has actually I think underperformed in the last 12 months even though they’ve had very strong growth and that’s caused the valuation to compress,” said Fingold, vice president of Dynamic Funds, who spoke on BNN Bloomberg on Monday. 

“They had very strong numbers last week and that got the stock going. And they’re expanding,” he said. “We’ve all read about the semiconductor shortage. This is literally an opportunity to be part of solving that problem — they’re on the leading edge nodes, they’ve beaten everybody down to four nanometers and, really, only Samsung has been able to keep up with them. There’s even stories that Intel will be buying more wafers from TSM because Intel’s having a terrible time trying to get to the leading edge nodes,” he said. 

Last week, Taiwan Semiconductor, the largest pure-play semiconductor fabrication company in the world, reported its fourth quarter 2021, showing revenue up 21 per cent year-over-year to about $15.74 billion and earnings up 19 per cent to about $1.15 per share. Analysts had been calling for EPS of about $1.12 per share. (All figures in US dollars.)

The quarterly beat was paired with a strong forecast from management which called for first quarter revenue of between $16.6 billion and $17.2 billion, above the analyst consensus of $15.7 billion. What’s more, TSM said it will be spending between $40 and $44 billion in the new year to grow its manufacturing capabilities. The company has been putting more into capex in recent years, with 2022 projected to be about 40 per cent higher than 2021’s capex which was itself a 73 per cent increase over 2020’s number.

“Our fourth quarter business was supported by strong demand for our industry-leading 5-nanometer technology,” said Wendell Huang, VP and Chief Financial Officer of TSMC, in a January 13 press release. “Moving into first quarter 2022, we expect our business to be supported by HPC-related demand, continued recovery in the automotive segment, and a milder smartphone seasonality than in recent years.”

The semi shortage is dragging on longer than many expected, with demand for chips still outpacing supply and industries like automobiles and consumer electronics feeling the pain continue now into a third year. Taiwan Semi competitor Samsung recently said its fourth quarter earnings would be 52 per cent higher than a year earlier.

“We are witnessing a structural increase in underlying semiconductor demand underpinned by the industry megatrends of 5G-related and HPC applications,” said Huang in TSMC’s fourth quarter conference call. “Out of the US$40 billion to US$44 billion CapEx for 2022, between 70 per cent and 80 per cent of the capital budget will be allocated for advanced process technologies, including 2-nanometer, 3-nanometer, 5-nanometer and 7-nanometer. About ten per cent will be spent for advanced packaging and mask making and ten per cent to 20 per cent will be spent for specialty technologies.”

For Fingold Taiwan Semi’s leadership in the industry should make it an easy choice for investors.

“Whenever you hear about the success of other semiconductor companies like an AMD, like an NVIDIA, Qualcomm and the largest fabless semiconductor company in the world which is Apple — when you hear about all those chips that go into their phones and computers, those are all made at either TSMC or Samsung, and TSMC is the technology leader with a leading market share,” said Fingold.

“Their research and development budget is bigger than all of their competitors’ budgets combined. That’s what allows them to maintain their lead. And they do that with a conservative balance sheet while paying a dividend,” he said.

Fingold said he holds TSMC in his client portfolios and recommends it even with the recent gains in share price, saying Taiwain Semi will play an outsized role in getting the world over the chip shortage.

“They’ve been the first to all the leading edge nodes, whether that be seven nanometers or four nanometers, for the last five or ten years. It’s really hard to avoid them,” Fingold said. “As we say, all roads lead to Taiwan Semiconductor.”

“They recently announced some excellent results and they announced some pretty significant investment in their business that speaks well for the equipment companies but also it speaks well for their own growth as they probably are the key company in solving the shortage of semiconductor wafers,” he said.