Is Taiwan Semiconductor Stock a Buy Now?

Taiwan Semiconductor Manufacturing Company, known as TSMC, has experienced remarkable success this year. Following a period of struggle that lasted three years in the chipmaking sector, TSMC is now seeing a tremendous surge in demand for its production services. The ongoing rise in artificial intelligence (AI) technology, which has been gaining traction for the past two years, is a significant factor contributing to this demand. Additionally, the automotive industry requires a substantial amount of processors, and the smartphone market is also rebounding after a long slump.

In 2024, TSMC's stock has remarkably doubled, causing its market capitalization to consistently hover around the impressive $1 trillion mark since October.

However, with such a sharp increase, there are concerns about whether TSMC's stock is now overvalued. Are these high prices justified, or is it still a wise investment opportunity?

Analyzing TSMC's Valuation

TSMC's business operates within the hardware manufacturing industry. Though it is a cutting-edge sector, it is characterized by relatively low profit margins and the necessity for significant capital investment. Building semiconductor facilities requires substantial resources and investment.

In the last four quarters, TSMC has spent $24.6 billion on capital expenditures, which is more than what major tech companies such as Apple, Tesla, and Nvidia combined have allocated for their capital investments.

Businesses with high capital requirements typically experience slower growth, leading their stocks to trade at lower valuation ratios. Currently, the top ten industrial stocks have an average price-to-sales (P/S) ratio of 2.5, whereas TSMC’s stock is valued at an astonishing ratio of 12.8 times sales. This disparity extends to other financial metrics such as price-to-earnings (P/E) and price-to-free cash flow ratios, where TSMC currently reflects historically high figures compared to its peers.

Reasons to Consider TSMC as an Investment

Despite the high valuation, TSMC backs its stock price with strong business performance. After facing short-term difficulties with semiconductor material shortages and skilled labor shortages, TSMC has reported a resurgence in sales and profits. Recently, its revenues soared by 39% year-over-year, while net income increased by an impressive 54% in the same period. Free cash flows witnessed a dramatic increase, nearly tripling to 185 billion Taiwanese dollars (around $5.7 billion in U.S. dollars).

While investors may be paying a premium for TSMC shares, its status as a leading global business justifies the expense in many eyes. When assessed with growth-oriented metrics, TSMC's valuations seem reasonable, showing a forward-looking P/E ratio of 23 based on next year's estimates and a price-to-earnings-to-growth (PEG) ratio of 1.1. Both figures indicate that the current stock price might be fairly positioned—not excessively inflated and not particularly cheap either.

TSMC: A Smart Investment for Select Investors

For many investors, TSMC represents an appealing opportunity, particularly those looking to tap into the growth potential of AI without having to choose specific winners in hardware design. Notably, most leading AI accelerator companies depend on TSMC and similar manufacturers to produce their technologies. Regardless of who emerges as a leader in the hardware landscape, TSMC is poised to thrive alongside the AI industry's expansion.

However, it's essential to be comfortable with TSMC's growth-focused valuation before investing. Those who prefer lower-priced chipmakers or undervalued AI software and services might want to consider alternatives. In summary, while TSMC is a solid growth investment, it may not suit everyone's investment strategy.

TSMC, investment, stock