Taiwan Semiconductor Manufacturing (NYSE: TSM) is on a roll. On the heels of a three-year droop in chipmaking providers, TSMC is going through unprecedented manufacturing demand. The factitious intelligence (AI) surge that began two years in the past appears to have legs for years, and that is not even the entire story — fashionable automobiles want a ton of processors, and the smartphone market can also be getting back from an extended downturn.
So, TSMC’s inventory has doubled in 2024. Its market cap has been hovering across the uncommon $1 trillion stage since October.
On the identical time, TSMC shares are buying and selling at lofty valuation ratios. Is the inventory overvalued in the present day, or is TSMC nonetheless an amazing purchase at in the present day’s excessive costs?
The corporate works in a {hardware} manufacturing business. It is a high-tech enterprise, far faraway from constructing properties, tractors, or industrial equipment, but it surely’s nonetheless a comparatively low-margin enterprise that requires very giant capital investments. Chipbuilding services do not develop on timber, you recognize.
TSMC’s capital bills added as much as $24.6 billion during the last 4 quarters. That is greater than Apple, Tesla, and Nvidia spent on capital investments — collectively.
Corporations with expensive property are inclined to develop pretty slowly, and their shares typically commerce as very modest valuation ratios. The ten largest industrial shares, for instance, at present commerce at a mean price-to-sales ratio (P/S) of two.5. TSMC’s inventory is value 12.8 occasions gross sales. It is the identical story with price-to-earnings or price-to-free money flows — TSMC’s inventory is hovering at traditionally excessive ratios, and it seems to be costly subsequent to firms with related enterprise fashions.
The corporate backs up its expensive inventory valuation with sturdy enterprise outcomes.
After a brief dip amid the latest scarcity of semiconductor supplies and engineers, TSMC’s gross sales and earnings are hovering once more. Revenues rose 39% 12 months over 12 months within the lately reported third quarter. Web revenue jumped 54% larger in the identical interval, and money earnings actually soared. TSMC’s free money flows almost tripled, rising 172% to $185 billion Taiwanese {dollars} (roughly $5.7 billion in U.S. {dollars}).
So it’s possible you’ll be paying a premium for TSMC shares, but it surely’s a world-class enterprise and arguably value each penny of its excessive inventory worth. Development-oriented valuation metrics look fairly affordable with a forward-looking P/E ratio of 23 occasions next-year estimates and a price-to-earnings-to-growth ratio (PEG) of 1.1. Each figures counsel that the present inventory worth is nearly proper — neither terribly costly nor significantly low-cost.