High inflation and softening demand for consumer electronics kept chip makers under pressure last year. The world’s largest integrated circuit foundry, Taiwan Semiconductor Manufacturing Company Limited (TSM), recently announced its fourth-quarter results, beating the consensus EPS estimate by 3.9%.

Although the company’s revenue rose from the prior-year quarter, it missed the consensus estimate by 1.7% in the last quarter of fiscal 2022. The Hsinchu City, Taiwan-based company’s operating margin of 52% came above its guidance between 49% and 51%. Also, its gross margin in the quarter came in at 62.2%, compared to 52.7% in the year-ago period.

Post the fourth quarter result announcement, TSM’s VP and Chief Financial Officer Wendell Huang said, “Our fourth quarter business was dampened by end market demand softness, and customers’ inventory adjustment, despite the continued ramp-up for our industry-leading 5nm technologies.”

For the first quarter of fiscal 2023, management expects revenue to come between $16.70 billion and $17.50 billion. Its gross profit margin will likely come between 53.5% and 55.5%, while its operating profit margin is expected to come between 41.5% and 43.5%.

Huang said on the current quarter of fiscal 2023, “Moving into the first quarter of 2023, as overall macroeconomic conditions remain weak, we expect our business to be further impacted by continued end market demand softness, and customers’ further inventory adjustment.”

In December last year, TSM announced the opening of its second chip plant in Arizona, raising its investment in the state from $12 billion to $40 billion. The second plant will produce 3-nanometer chips, with production starting in 2026.

In November 2022, veteran investor Warren Buffett’s Berkshire Hathaway disclosed that it had bought about 60.1 million American depository receipts in TSM. TSM is Buffett’s first investment in the semiconductor space.

TSM has gained 16.6% in price over the past month and 37.1% over the past three months to close the last trading session at $88.99.

The company’s annual dividend of $1.82 yields 1.93% on the current share price. It has a four-year average yield of 2.48%. Its dividend payouts have increased at a 9.6% CAGR over the past five years.

Here’s what could influence TSM’s performance in the upcoming months:

Robust Financials

TSM’s net revenue increased 42.8% year-over-year to NT$625.53 billion ($20.64 billion) for the fourth quarter ended December 31, 2022. The company’s net income increased 77.8% year-over-year to NT$295.88 billion ($9.76 billion). Its EPS came in at NT$11.41, representing an increase of 78% year-over-year.

For the fiscal year ended December 31, 2022, TSM’s net revenue increased 42.6% year-over-year to NT$2.26 trillion ($74.56 billion). Also, its net income rose 70.3% year-over-year to NT$1.02 trillion ($33.65 billion). In addition, its EPS came in at NT$39.20, representing an increase of 70.4% from the prior year's period.

Mixed Analyst Estimates

TSM’s EPS for fiscal 2023 is expected to decline 13.4% year-over-year to $5.69. Its revenue for fiscal 2023 is expected to increase 2.1% year-over-year to $76.06 billion. Its EPS and revenue for fiscal 2024 are expected to increase 23% and 20.7% year-over-year to $7 and $91.81 billion, respectively.

Mixed Valuation

In terms of forward non-GAAP P/E, TSM’s 15.64x is 20.8% lower than the 19.74x industry average. Its forward EV/EBIT of 12.50x is 24.6% lower than the 16.56x industry average.

However, the stock’s 5.40x forward EV/S is 95.9% higher than the 2.75x industry average. In addition, its 5.66x forward P/S is 103.4% higher than the 2.78x industry average.

High Profitability

In terms of the trailing-12-month gross profit margin, TSM’s 59.56% is 20.3% higher than the 49.53% industry average. Likewise, its 68.84% trailing-12-month EBITDA margin is 494.7% higher than the industry average of 11.58%. Furthermore, the stock’s 49.53% trailing-12-month EBIT margin is 647.9% higher than the industry average of 6.62%.

POWR Ratings Show Promise

TSM has an overall rating of B, which equates to a Buy in our POWR Ratings system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. TSM has an A grade for Quality, consistent with its high profitability.

It has a C grade for Value, in sync with its mixed valuation.

TSM is ranked #25 out of 93 stocks in the B-rated Semiconductor & Wireless Chip industry. Click here to access TSM’s Growth, Momentum, Stability, and Sentiment ratings.

Bottom Line

The stock is trading above its 50-day and 200-day moving averages of $77.44 and $82.48, respectively, indicating an uptrend. Despite softening demand in the end market, TSM posted strong earnings and revenue in the fourth quarter.

The company has guided for continued end-market demand softness in the first quarter of fiscal 2023. With the growing usage of high-performance chips, TSM’s long-term growth prospects look solid, especially as it has a 60% market share in the foundry space.

Moreover, its significant investments to increase production is expected to bolster its profitability in the long term. Given its robust financials and high profitability, it could be wise to buy the stock now.

How Does Taiwan Semiconductor Manufacturing Company Limited (TSM) Stack up Against Its Peers?

TSM has an overall POWR Rating of B, equating to a Buy rating. Check out these other stocks within the Semiconductor & Wireless Chip industry with an A (Strong Buy) or B (Buy) rating: Renesas Electronics Corporation (RNECF), Xperi Inc. (XPER), and United Microelectronics Corporation (UMC).

TSM shares rose $0.59 (+0.66%) in premarket trading Wednesday. Year-to-date, TSM has gained 20.00%, versus a 4.20% rise in the benchmark S&P 500 index during the same period.

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

More...