TSM Stock: Taiwan Semiconductor plans global expansion to beat chip shortage

The digitalization wave set off by coronavirus has had a mixed impact on the semiconductor industry, with companies registering record-high orders but struggling to fulfill them. When Taiwan Semiconductor Manufacturing Company Limited (NYSE: TSM), the largest semiconductor foundry in the world, reported earnings earlier this week investors got fresh insights into the demand boom and deepening chip shortage.

Capacity Expansion

The company, headquartered at Hsinchu in Taiwan, has an important role to play in the ongoing efforts to resolve the crippling microprocessor shortage. Recently, the management revealed plans for an extensive global expansion, with focus on boosting capacity at the U.S facility and setting up a specialty technology wafer fabrication plant in Japan. A bigger production footprint should help the company better serve its customers, including high-profile tech firms like Apple (NASDAQ: AAPL).

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The market value of Taiwan Semiconductor grew sharply in the past twelve months, hitting a record high in February this year. While the future growth prospects look bright, the persistent market volatility and the pressure on margins call for caution as far as investing in the stock is concerned. Analysts’ consensus rating is moderate buy, but TSM can be a great long-term pick. Continuing its post-earnings pullback, the stock traded lower Friday afternoon, after closing the previous session at $117.53.

Chip Woes to Stay

Latest reports suggest that the ongoing chip shortage might extend into 2022 since the existing capacity might not be sufficient for manufactures to meet the high demand, though the situation is likely to improve in the coming months. But raisng output beyond a certain limit is not a good idea as it can affect profit margins negatively.

We are witnessing a structural increase in underlying semiconductor demand as the multi-year megatrend of 5G- and HPC-related applications are expected to fuel massive increase in computation power and greater need for energy-efficient computing, which will require leading-edge technologies. COVID-19 has also fundamentally accelerated the digital transformation, making semiconductors more pervasive and essential in people’s lives.

C. C. Wei, Chief Executive Officer of Taiwan Semiconductor Manufacturing Compnay

Record Sales

In the most recent quarter, earnings of Taiwan Semiconductor increased by 11% to $0.93 per ADS, which is in line with analysts’ consensus estimates. Margins got a boost from a 20% surge in revenues to a record high of $13.3 billion, exceeding the market’s prediction. Interestingly, the automotive industry was a key growth driver this time, besides high-performance computing.

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Going by the management’s upbeat guidance, which according to some experts is too optimistic, the company seems to be confident about fulfilling customer orders in the coming months. But it has an impressive track record as far as meeting targets is concerned. The company has pioneered the highly advanced 5-nanometer chips and delivered as many as 11,617 different products to 510 customers in 2020.

Bullish Outlook

The smartphone and computer markets have been witnessing record sales ever since the shelter-in-place orders were imposed early last year, ushering in a new work/education culture that is heavily dependent on electronic gadgets. There is every reason to believe that the transformation — digital adoption and change in the way businesses operate — would continue beyond the crisis. That means busy days are awaiting companies which are part of the digitalization process, both directly and indirectly.