TSMC: 3 Reasons To Buy This Semiconductor Play

Core Viewpoint - Taiwan Semiconductor Manufacturing Company (TSMC) has reached a new 1-year high driven by optimism regarding its ability to sustain top line growth and capitalize on the rising demand for AI chips, despite a 73% year-to-date gain in valuation [2][12]. Financial Performance - In Q1'24, TSMC reported a 13% increase in net revenue to $18.9 billion, surpassing its own guidance of $18.0-18.8 billion [7][10]. - Free cash flows grew over 200% year-over-year, significantly outpacing revenue growth, which increased 17% [9][11]. - The company's free cash flow margin improved to 43% in Q1'24, indicating strong operational efficiency [9][14]. Market Position - TSMC holds a dominant position in the global foundry market with a market share of 62% as of Q1'24, up from 60% in FY 2023 [5][14]. - The company is benefiting from a surge in demand for AI chips, evidenced by receiving $6.6 billion in grants from the U.S. government to boost domestic production [5][11]. Growth Catalysts - Continued acceleration in free cash flow growth is expected as demand for chips remains high and the market is currently undersupplied [11]. - TSMC's management may focus on capital returns, including stock buybacks, as free cash flows increase [11][14]. - The company is projected to grow its earnings per share (EPS) by 24% annually in the long term, supported by its strong market position and free cash flow growth [12][14]. Valuation Insights - Despite a significant rise in valuation, TSMC is considered relatively cheap based on earnings, with a forward P/E ratio of 22.6X, which is below the industry average of 26.0X [12]. - If TSMC's valuation aligns with a P/E ratio between 26.0-29.5X, its fair value could range from $207 to $235, indicating substantial revaluation potential [12].