TSMC STOCK ANALYSIS - 2X STOCK! Price Target $255/share!
Hello everyone, this is Victor here. Welcome to the Intelligent Investor Channel where you will learn about stock investing and personal finance that will help you become a great investor. As a long-term investor, I always like to look for “the best companies in the fast-growing tech industries to invest in the long-term.” One of the best tech companies I like a lot right now is Taiwan Semiconductor Manufacturing Company TSMC or TSM stock. In this video, I’m going to talk about “the catalysts that I believe will help TSMC double its share price to $255/share and $1.3 trillion market cap.”
I am going to cover these topics in this video: TSMC stock performance Stock valuation comparison Business overview 1st Catalyst: enormous demand for semiconductor chips 2nd Catalyst: TSMC’s management expects much higher revenue growth in the next 5 years 3rd Catalyst: TSMC’s enormous Capex in 2021 TSMC’s competition and risks What I am planning to do going forward If you like this video, smash the like button, subscribe, and turn on the notification button. I will continue to make many excellent stock investing analysis videos that will help you become a great investor. Let’s start. TSMC has been the best performing stock in the past 5 years compared with its two biggest competitors Intel and Samsung Electronics. This is from Bloomberg.
In the past 6 months, TSMC stock increased 60% while Samsung increased 45%, and Intel increased 21%. Intel stock recovered a little bit because Intel recently replaced its CEO. In the past 1 year, TSMC stock increased 127% while Samsung increased 38%, and Intel decreased almost -12%.
In the past 5 years, TSMC stock increased 475% while Samsung increased 269%, and Intel increased 103%. Intel stock underperformed a lot compared with TSMC and Samsung in the past 5 years because Intel’s own in-house fabrication processes had manufacturing defects and could not produce enough yields for its desktop 10nm and 7nm processors. This is why Intel’s next-gen 10nm and 7nm processors have been delayed multiple times. This made Intel falling behind AMD’s Zen 3 processors and also behind TSMC’s 7nm, 5nm, and upcoming 3nm node technologies. In terms of stock valuation, I like to compare a stock’s current valuation with other major competitors to see if the stock is undervalued, fairly valued, or overvalued.
I normally don’t use the discounted cash flow model to value a stock because it is very hard to predict the stock’s future earnings and free cash flow accurately for 5 years and more. When it comes to stock valuation, the simpler the method is, the better. All these data are from Bloomberg. So using this stock valuation comparison method, you can see TSMC has the highest price-to-earnings ratio of 31.63 compared with Intel’s 12.59 and Samsung’s 21.74. The P/E ratio does not tell you if a stock is undervalued, fairly valued or overvalued, because we need to consider the company’s expected growth.
A company with a higher growth rate should always have a higher p/e ratio. If you look at the most recent Q4 2020 revenue growth compared with Q4 2019, you can see TSMC had the highest revenue growth year-over-year. TSMC had +14% growth year-over-year while Intel’s revenue decreased -1%, and Samsung’s increased +3%. The PEGY ratio is a much better way to tell us if a stock is undervalued, fairly valued, or overvalued because we compare the stock’s P/E ratio to the stock’s expected growth rate and dividend yield.
Generally speaking, a lower PEGY ratio means that the stock is cheaper, and a high PEGY ratio means the stock is more expensive. According to Bloomberg, TSMC has a PEGY ratio of 1.57 compared with Intel’s 1.67 and Samsung’s 1.32. This means TSMC is likely fairly valued now or even cheaper than Intel because TSMC has the highest growth rate compared with Intel and Samsung. TSMC’s management expects that TSMC will have +10% to 15% growth each year for the next 5 years. I will talk about this later.
If you are a long-term fundamental investor like me, it’s very important to understand TSMC’s business, its technologies, its future economic prospects, and its competitive advantages compared with its competitors. This is from TSMC ‘s company website that describes TSMC’s business. Established in 1987, TSMC is the largest pure-play foundry in the world, even bigger than Intel and Samsung. TSMC does not design its chips, not like Intel that designs and manufactures its high-end chips in-house. TSMC focuses on manufacturing semiconductor products for its customers. TSMC’s largest customers include “Apple, AMD, Qualcomm, MediaTek, Nvidia, and even Intel.”
TSMC manufactures semiconductor products used in “mobile devices, high-performance computing, automotive electronics and Internet of Things. TSMC’s leading node technologies include its 10nm, 7nm, 5nm, and the upcoming 3nm node processes. Here is the very important part.
TSMC and Samsung are a duopoly in the pure-play foundry industry. In terms of market share in revenues, according to TrendForce, TSMC had a market share of 54% while Samsung had 17% in 2020. TrendForce estimates that TSMC will have the same 54% market share while Samsung will have an 18% market share in 2021.
We can say a TSMC is a near-monopoly in the foundry industry. The only company that can compete with TSMC in advanced node technologies is Samsung Foundry. Here is the 1st catalyst that I believe will help TSMC double its share price to $255/share and $1.3 trillion market cap within 3 years. Right now, there is an enormous demand for semiconductor chips around the world, driven by the pandemic that started in 2020. The demand for semiconductor chips is much higher than the supply now. This is because more people are working from home, more people are buying personal computers, more people are buying 5G smartphones especially in Asia, more people are buying gaming consoles, more people are buying internet-connected devices, and more people are buying electric vehicles—all these devices need advanced semiconductor chips.
According to the Bloomberg article here, there is an enormous chip shortage that is needed for smartphones, for gaming consoles such as the PS5 and Xbox Series, and even for car manufacturers such as GM, Ford, and Volkswagen. On the personal computer side, there is an enormous shortage of supplies for high-end CPUs and GPUs. The demand for high-end CPUs and GPUs is far higher than the supply. People are working from home more, playing more games, investing more in high-end CPUs and GPUs, and buying more gaming consoles.
Cryptocurrency miners are also buying high-performance GPUs. The largest tech companies in the world—including Apple, Qualcomm, Nvidia, AMD, Microsoft, and Sony—design their own chips, but they do not manufacture their chips. They outsource to pure-play foundries with the best node technologies to manufacture their chips, so which pure-play foundries will benefit the most? As of now, there are only two largest foundries in the world that have the most advanced node processes (10nm, 7nm, 5nm, and the upcoming 3nm processes)—they are TSMC that owns about 54% market share, and Samsung Foundry that owns about 18%. Here is the 2nd catalyst. This is from TSMC’s latest earnings call. TSMC’s management said “Now I will talk about our 2021 outlook.
For the full year of 2021, we forecast the overall semiconductor market, excluding memory, to grow about 8%, while foundry industry growth is forecast to be about 10%. For TSMC, we are confident we can outperform the foundry revenue growth and grow by mid-teens percentage in 2021 in U.S. dollar term. Our 2021 business will be supported by strong demand for our industry-leading advanced and specialty technologies, where we see stronger interest from all 4 growth platforms, which are smartphone, HPC, automotive, and IoT (Internet of Things).” “We are entering a period of higher growth as a multiyear megatrend of 5G and HPC-related applications are expected to fuel strong demand for our advanced technologies in the next several years. We expect global smartphone units to grow 10% year-over-year in 2021. We forecast the penetration rate for 5G smartphone of the total smartphone market to rise from 18% in 2020 to more than 35% in 2021.
We expect the silicon content of a 5G smartphone to continue to increase as compared to a 4G smartphone.” “HPC (High-performance Computing) is an increasingly important driver of TSMC's long-term growth and the largest contributor in terms of our incremental revenue growth.” “We now expect our long-term revenue growth to be 10% to 15% CAGR from 2020 to 2025 in U.S. dollar terms.” There are many things said here. TSMC’s management anticipates that TSMC can outperform the foundry industry’s forecasted growth of 10% in 2021. TSMC anticipates that its long-term growth will be 10% to 15% each year between 2020 and 2025.
Here is the very important part. There are 4 main growth areas that are driving TSMC’s current growth now—these areas are first smartphones, specifically 5G phones that need much more powerful and energy-efficient chips; second, high-performing computing for 5G networks, high-end CPUs, and GPUs in personal computers and data centers; third, automotive especially electric vehicles and autonomous driving tech that need many more high-performance and energy-efficient microchips than the traditional internal-combustion engine cars; and fourth, internet of things devices. If you look at TSMC’s past 5 years growth between 2016 and 2020, its revenue grew at a compound annual growth rate (CAGR) of 9.02% each year, and its earnings-per-share grew
at a CAGR of 11.57% each year. Here is the interesting part—during the same period, TSMC stock increased almost 5 folds (+474.55%) because of the enormous demand for high-performing computing products such as CPUs, GPUs, and mobile chips. TSMC benefited a lot from the pandemic.
Now, TSMC expects a higher growth rate of 10% to 15% each year between 2020 and 2025. This is why I believe TSMC’s stock will double within the next 3 years, considering TSMC stock increased almost 5 folds in the past 5 years when its earnings-per-share grew at a CAGR of 11.57% each year. For the next 5 years, even after the pandemic is over, I believe there will still be an enormous demand for high-performing computing used in smartphones, CPUs, GPUs, data centers, 5G networks, electric vehicles, and autonomous tech.
This is why TSMC is forecasting its growth will be between 10% to 15% each year between 2020 and 2025. The 3rd catalyst is TSMC’s enormous capital budget in 2021 mainly for investing in advanced node technologies. This is from the most recent earnings call. “Every year, our CapEx (capital budget) is invested in anticipation of the growth that will follow in the next few years.”
“In 2020, we spent USD 17.2 billion to capture the strong demand for our advanced technologies and support our customers' capacity needs. In order to meet the increasing demand for our advanced and specialty technologies and further support our customers' capacity needs, our 2021 capital budget is expected to be between USD $25 billion and USD $28 billion. Out of the $25 billion to $28 billion CapEx for 2021, about 80% of the capital budget will be allocated for advanced process technologies, including 3-nanometer, 5-nanometer, and 7-nanometer; about 10% will be spent for advanced packaging and mask making; and about 10% will be spent for specialty technologies.” “Because of the increased investment, we were able to capture the growth opportunities and deliver about 15% growth CAGR from 2010 to 2015.”
“Today, as we enter another period of higher growth, we believe a higher level of capacity -- of capital intensity is appropriate to capture the future growth opportunities. We now expect a higher growth CAGR in the next few years driven by the industry megatrends of 5G and HPC-related applications.” TSMC’s capital expenditure will be between $25 billion USD and $28 billion USD in 2021, up from $17.2 billion Capex in 2020. This is an enormous capital budget increase.
In comparison, Intel’s capital budget was only between $14.2 billion and $14.5 billion in 2020. TSMC wants to capture the enormous growth opportunities in 5G networks, 5G mobile devices, CPUs, GPUs, high-performance processors used in game consoles, data centers, electric vehicles, and many other applications.
This is why TSMC is investing 80% of the capital budget in advanced node technologies such as 3nm, 5nm, and 7nm to stay ahead of competition from Samsung and Intel. This will allow TSMC to grow between 10% and 15% CAGR each year between 2020 and 2025. Now, I want to talk about TSMC’s competition and risks.
As of now, not even Intel can compete with TSMC in advanced node manufacturing. TSMC is at least 2 generations ahead of Intel in node technologies and slightly ahead of Samsung. TSMC’s 3nm process is expected to have volume production in the 2nd half of 2022. In comparison, Intel expects that it will release its next-gen 7nm processors in 2023, assuming Intel does not delay again. Just to be clear, 10nm, 7nm, or 5nm naming in microchips is just a marketing term for companies. Every company’s node manufacturing tech is different.
Intel’s 10nm process is comparable to TSMC’s 7nm when it comes to actual performance, transistor density, and efficiency. And Intel’s 7nm process is expected to be comparable to TSMC’s 5nm process. Assuming Intel does not delay releasing its 7nm processors in 2023, TSMC will already be mass-producing 3nm processors for its largest customers such as AMD by 2023. This means TSMC’s manufacturing processes will still be at least 1 to 2 generations ahead of Intel by the time Intel releases its 7nm processors in 2023. For example, TSMC already mass-produced 5nm A14 processors and M1 chips for Apple in 2020. Samsung foundry is the only competitor that can compete with TSMC when it comes to 7nm, 5nm, and 3nm processes.
TSMC is still holding the largest 54% market share in global foundry revenue now. TSMC’s biggest risk is likely anti-trust since it has the largest foundry market share in the world. Regulators always target companies with the dominant market share.
I cannot predict whether there will be antitrust allegations later on. But based on what I know, TSMC has gained the largest 54% market share, because it has invested billions year-after-year to develop the most advanced node manufacturing processes ahead of competitors—not because of anti-competitive behaviors. So what I will be doing going forward? TSMC is one of my favorite long-term stocks right now. I invested in the TSMC stock about 1 month ago before making this video (that is about 7% of my portfolio). I am planning to hold TSMC stock for many years.
I always like to invest in the best tech companies with the best future economic prospects for the long-term. Some of the biggest gains in my portfolio came from Apple, Amazon, Google, and Microsoft, and now Tesla, because I invested in them for many years. I believe TSMC’s stock will double in value to around $255/share and $1.3 trillion market
cap within 3 years because of the main catalysts I talked about in this video. TSMC’s management is investing an enormous capital of $25 billion to $28 billion in 2021, so the company can grow at a CAGR of 10% to 15% each year between 2020 and 2025. If you like this video, smash the like button, subscribe, and turn on the notification button.
I will continue to make many excellent stock investing analysis videos that will help you become a great investor. This is Victor from the Intelligent Investor Channel. Leave your comments below. Thank you for watching!