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Semiconductor stocks are an integral part of the future. The chips produced by the company are essential in electronic devices, enabling advancements in communications, transportation, computing, health care, military systems, and many other applications.
Of course, as part of a diversified portfolio, I think there should be some exposure here. I already have a stake in it Taiwan Semiconductor Manufacturing Company (NYSE: TSM ) but I want to add some exposure to the sector.
As it turns out, TSMC appears to be the pick of the bunch due to its relative value and technological superiority. So maybe I should buy more. Let’s explore TSMC and each other.
Significant discount market leader
In 2022, Warren Buffett’s fund, Berkshire Hathaway, invested more than $4.1bn into TSMC. Usually this is a good sign for investors – the Oracle of Omaha tends to know what it’s doing.
Buffett bought at the end of the year when the stock price has slumped. The world’s largest semiconductor company sees its share price falling from a high above $130 in 2021 to a low of $58 in 2022.
However, the company’s performance does not reflect this falling stock price. TSMC posted very strong growth, with net profit rising from $56bn in 2021 to $75bn in 2022 – an impressive 33% growth. Meanwhile, despite high inflation, gross margin increased from 51.6% to 59.6%.
TSMC’s growth is expected to slow to one digit in 2023, but this should be priced in. CEO CC Wei expects the market for semiconductors to bottom out in H1 before recovering in the latter half of the year.
Focusing on valuation, the Taiwan-based company trades at a price-to-earnings ratio of 14. That’s lower than the information technology average of 24.6 and the semiconductor sector average of 15.8.
TSMC consideration
An evaluation of TSMC’s discount versus its peers illustrates several things. First, there are geopolitical concerns about Chinese desire on the island of Taiwan where the company is based. TSMC is expanding its geographic footprint, and this should ease long-term fears about Chinese aggression and its impact on stocks.
We also need to consider the impact of large capital expenditures (capex) on earnings per share. TSMC spent $36.3bn on capex last year – which is huge although slightly less than expected. The massive spending reflects a strategy for multiple manufacturers to move to other locations as they move to produce more dense power-efficient chips – the investment required to introduce a market-leading 3nm chip will cost $32bn.
In the long term, analysts insist the move to higher-end small chips will strengthen the company’s market leadership position. Right now, TSMC looks like good value going forward, and that’s why I’ll be buying more.
One to keep my eye on
It’s not that I’m not interested in other listed semiconductor stocks. But I’m excited about ARM’s potential IPO this year. After the $40bn takeover by NVIDIA collapse, SoftBank Group – which owns ARM – will be looking for new ways to release value from the British semiconductor and software design business. It might not be the best time to list, after the tech crash of 2022, but it’s something I’d like to do.
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