The stock of Taiwan Semiconductor Manufacturing Co (TPE:2330, 30-year Financials) gives every indication of being significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of NT$602 per share and the market cap of NT$15610.1 billion, Taiwan Semiconductor Manufacturing Co stock gives every indication of being significantly overvalued. GF Value for Taiwan Semiconductor Manufacturing Co is shown in the chart below.
Because Taiwan Semiconductor Manufacturing Co is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 11.1% over the past three years and is estimated to grow 13.79% annually over the next three to five years.
Link: These companies may deliever higher future returns at reduced risk.
It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Taiwan Semiconductor Manufacturing Co has a cash-to-debt ratio of 2.18, which is in the middle range of the companies in Semiconductors industry. The overall financial strength of Taiwan Semiconductor Manufacturing Co is 8 out of 10, which indicates that the financial strength of Taiwan Semiconductor Manufacturing Co is strong. This is the debt and cash of Taiwan Semiconductor Manufacturing Co over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Taiwan Semiconductor Manufacturing Co has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of NT$1339.2 billion and earnings of NT$19.7 a share. Its operating margin is 42.32%, which ranks better than 97% of the companies in Semiconductors industry. Overall, GuruFocus ranks the profitability of Taiwan Semiconductor Manufacturing Co at 9 out of 10, which indicates strong profitability. This is the revenue and net income of Taiwan Semiconductor Manufacturing Co over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Taiwan Semiconductor Manufacturing Co's 3-year average revenue growth rate is better than 71% of the companies in Semiconductors industry. Taiwan Semiconductor Manufacturing Co's 3-year average EBITDA growth rate is 11.7%, which ranks in the middle range of the companies in Semiconductors industry.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Taiwan Semiconductor Manufacturing Co's ROIC is 28.30 while its WACC came in at 9.17. The historical ROIC vs WACC comparison of Taiwan Semiconductor Manufacturing Co is shown below:
In closing, The stock of Taiwan Semiconductor Manufacturing Co (TPE:2330, 30-year Financials) is believed to be significantly overvalued. The company's financial condition is strong and its profitability is strong. Its growth ranks in the middle range of the companies in Semiconductors industry. To learn more about Taiwan Semiconductor Manufacturing Co stock, you can check out its 30-year Financials here.
To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.
