Taiwan Semiconductor (New York Stock Exchange:TSM) is the world's largest contract chip manufacturer and has benefited from the continued recovery in the global chip market in recent months. TSM stock is up 58% over the past 12 months, and I think it has the potential for further upside as AI technology continues to develop. I have a bullish view on Taiwan Semiconductor. The company believes that the competitive advantages it enjoys will drive revenue growth in the coming years.
TSM enjoys a competitive advantage
A company's long-term earnings growth potential depends primarily on the nature of the competitive advantage it enjoys. There are several reasons why Taiwan Semiconductor enjoys such a competitive advantage.
First, Taiwanese semiconductors (along with Samsung)OTC:SSNLF) is a market leader in the development of cutting-edge process technology, commonly known as nodes. These nodes are expensive to manufacture and require complex engineering processes to develop, making it increasingly difficult for small and medium-sized companies to compete with Taiwan and Samsung in this space.
Taiwan Semiconductor was the first chipmaker to commercialize 5nm chips and is already actively working on commercializing 3nm and 2nm chips. These small nodes play a critical role in the development of AI servers and other high-performance applications because they can provide faster and more efficient performance compared to larger nodes.
In addition to manufacturing high-performance, compact chips, TSM has also expanded its capabilities in the area of ​​chip packaging solutions. The company's new 3D fabric technology promises increased performance and density by vertically stacking multiple chip components.
Second, Taiwan Semiconductor has formed strategic partnerships with industry leaders in various technology sub-sectors, ensuring expansion of the sales pipeline and therefore actively investing in the development of advanced products. I can. TSM's notable customers include Apple (NASDAQ:AAPL), NVIDIA (NASDAQ:NVDA), and Advanced Micro Devices (NASDAQ:AMD).
Third, the company's Open Innovation Platform (OIP) fosters long-term partnerships with customers across the semiconductor value chain and delivers stable revenues. The platform allows customers to search for suitable intellectual property components and design solutions that fit into TSM's manufacturing processes. This allows customers to bring their products to market seamlessly and quickly compared to sourcing their IP components from multiple platforms.
On the other hand, IP owners have historically demonstrated a willingness to participate in OIPs to expose themselves to potential customers. This created a flywheel effect and increased the ecosystem value of the platform. OIP has played a key role in the recent success of his TSM foundry business.
Finally, Taiwan Semiconductor maintains a very healthy balance sheet due to its net cash position. Its cash balance of $54.97 billion far exceeds its long-term debt of $29.9 billion. The company has maintained a consistent net cash position over the past 10 years, an impressive achievement given the cyclical nature of the semiconductor industry and the large capital investments required to improve manufacturing processes.
This net cash position allows Taiwan Semiconductor to easily fund aggressive capital investments, including the construction of new manufacturing facilities, which is critical to maintaining its technological lead in the chip space. Additionally, the net cash position adds a layer of safety to the company's dividend, while opening up new opportunities through inorganic growth measures such as the acquisition of smaller companies with valuable chip manufacturing technology.
The semiconductor market is on a recovery trend
The semiconductor industry is cyclical, so it's important to understand the current stage of the economic cycle before investing in chip companies. Empirical evidence shows that these cycles can last for several years.
After hitting a record high in 2022, global chip sales fell 8.2% from the previous year to $526.8 billion in 2023, according to data from the Semiconductor Industry Association. However, it is clear that semiconductor sales gained momentum in the second half of 2023. That's up from the 11.6% year-over-year growth in chip sales recorded in the fourth quarter. Industry experts believe the semiconductor market will continue to recover in 2024, creating growth opportunities for major chipmakers.
Deloitte predicts that global semiconductor sales will reach $588 billion this year, exceeding the peak revenue reported in 2022. These expectations are based on several positive developments, including reduced supply chain disruptions and continued demand for AI and other high-performance computing applications. and the anticipated revival of the auto sector.
As a leader in the global chip market, Taiwan Semiconductor is well-positioned to benefit from these favorable developments in 2024.
TSM competitiveness and strategic expansion
TSM's revenue growth is driven by competitive advantages. The success of the company's foundry business has helped build on these advantages. Currently, Intel Corporation (NASDAQ:INTC) is actively investing in foundry business to change its fortunes, threatening Taiwan Semiconductor's lead. But it will take years, if ever, for these efforts to make meaningful inroads into TSM's market share.
On a different note, the company's expansion into Japan should help alleviate some of the negative impact of deteriorating US-China relations. TSM's first factory in Japan began operations earlier this year, and a second factory is also under construction in southwest Japan and is expected to be operational by 2027.
Is Taiwan Semiconductor a buy, according to analysts?
Recently, Bank of America (New York Stock Exchange:BAC) Analyst Brad Lin writes that TSM will likely continue to stay ahead of Intel thanks to its technology leadership, attractive cost structure and strength of business model. Overall, based on ratings from five of Wall Street's best analysts, Taiwan Semiconductor's average price target is $138.83, which implies a downside of 6.2% from the current market price. Suggests.
Based on Wall Street expectations, TSM looks slightly overvalued today, but not by much. That being said, investing in a great business that isn't that overvalued can still be a good bet, and that is Taiwan Semiconductor right now. The company is well positioned to maintain its technological lead while expanding into new end markets.
Bottom line: TSM has room for further growth
With improving macroeconomic conditions, Taiwan Semiconductor is expected to see strong sales and profit growth in 2024. Due to several competitive advantages, the company is unlikely to be dethroned as the world's largest contract chip maker in the near future. Meanwhile, TSM's strong financial position will help the company expand into new markets, adequately reward shareholders through dividends, and seek out potential acquisition candidates.
disclosure