The Taiwan Semiconductor Manufacturing Company (NYSE: TSM), also known as TSMC, has been in the news a lot lately due to global shortages in semiconductors. These are the computer chips used in mobile devices, electric vehicles, cash registers, fighter jets and kitchen appliances. In fact, anything that runs online contains a semiconductor. The shortage has been caused by supply chain problems due to the pandemic and production problems at manufacturing facilities.
TSMC financial update
This week TSMC released an update reporting that its revenue for January through April rose 16% year-on-year.
This hasn’t had much impact on the share price overall. Last year, the TSMC share price soared, but it has only risen 1% year-to date. It’s also now down 20% from its 52-week-high. It has a price-to-earnings ratio of 30 and dividend yield of 1.5%.
TSMC is a serious heavyweight in the semiconductor market, with a market cap of $551bn. Its main competitors are Samsung, with a $480bn market cap, Intel which is worth around $222bn, and Qualcomm at $144bn.
TSMC counts Apple as a partner and is helping to create its micro-OLED displays for use in wearable augmented reality devices.
The company expects its capital expenditure (capex) for the next three years to come in around $100bn. It will spend this on land, factories, and equipment. Its capex cost for 2020 was $17.4bn, so this projection is a considerable jump. I find this reassuring as it tells me the company is ploughing money into solidifying its position and growing.
TSMC ended Q1 with cash and marketable securities of $28bn, while its debt level is under $10bn. This gives it a considerable free cash flow balance.
Risks to shareholders
Chip shortages are expected to continue for some time, possibly up to 18 months. This could put pressure on the TSMC share price, so volatility is to be expected.
There’s also mounting pain in the global tech sector as financial markets pull back. The Taiwan stock exchange was down 6% last night compounded by virus worries. TSMC has a dual-listing in Taiwan and New York.
Then there’s also geopolitical pressure coming from the US and China. The US is looking to bring semiconductor manufacturing home, as are China and Europe. Meanwhile, additional political tensions rage on between Taiwan and China.
There’s no doubt this rising domestic pressure will raise the likelihood of increased competition. Soaring demand is already encouraging other companies to up their chip manufacturing efforts. Samsung has said it’s spending $116bn on its next-generation chip business, and Intel is investing $20bn.
Nevertheless, while Taiwan would prefer to keep its chip manufacturing domestic, TSMC is beginning to venture further afield. It has plans to build a state-of-the-art wafer fabrication plant in Arizona and intends to install new production lines at its existing facility in Nanjing, China, to produce chips for car makers.
I think the global chip shortage has shown us how vital a component chips are in so much of our tech. The arrival of 5G will further compound that. For that reason, I’d happily add shares of TSMC to my Stocks and Shares ISA because it’s a clear leader in the space and I think it’s got a long growth opportunity ahead.
I do currently have access to this stock through my holding in the Fidelity Asian Special Situations fund, of which TSMC has an 8.9% weighting.