In 2021, over 11 million vehicles had to be removed from production due to semiconductor shortages, according to Statista. Industry executives also predict that the semiconductor shortage is expected to continue into 2022 and for some products even into 2023, according to Automotive News.
So which companies are stepping up to the plate to meet the rapidly-growing semiconductor demand that has a variety of industries complaining of "supply shortages" hampering their growth? For the most part, everything seems to hinge on the dominant market leader, Taiwan Semiconductor Manufacturing (TSM, Financial).
Unrivaled dominance
Taiwan Semiconductor is the world's largest semiconductor foundry (foundries produce chips for other companies). The global giant manufactures 11,617 different products with 281 distinct technologies for over 510 customers. Taiwan Semiconductor's customers include the likes of Apple (AAPL, Financial), Nvidia (NVDA, Financial) and Qualcomm (QCOM, Financial).
Most chip companies, especially in the U.S., create their designs and then send them to to a foundry like Taiwan Semiconductor to be manufactured with the best quality and at scale. Scale is essential to chip production; the bigger the foundry, the more efficient it is and the fewer production errors it makes.
The dominance of Taiwan Semiconductor in terms of market share can be seen in the pie chart below:
Taiwan Semiconductor leads the way in semiconductor technology, while Intel (INTC) has struggled and fallen behind. Intel’s 7nm chip was delayed substantially due to a production issue. Meanwhile, Taiwan Semiconductor has annouced their new 5nm node chips which are being supplied to Apple. In addition, the firm is expected to start mass production of its 3nm process by 2023, extending its massive lead over Intel. Intel is making efforts to become a foundry in its own right once again in order to meet the supply shortages, but it clearly has a long way to go if it wants to catch up.
Gurus buying
Taiwan Semiconductor was recently bought by George Soros (Trades, Portfolio); according to Soros' latest 13F, the guru was acquiring shares during the fourth quarter of 2021, during which shares averaged $117. The stock is down 8% from these levels. In addition, Al Gore (Trades, Portfolio) and growth stock investor Ron Baron (Trades, Portfolio) also own shares of the stock. Below is a chart showing the number of guru buys and sells of the stock in recent quarters:
Fierce financials
Taiwan Semiconductor has strong financials with a three-year compound annual growth rate (CAGR) of 15% for revenue. Growth was 20% over the last year. Revenues at today’s currency conversion rates stand at $56.2 billion on $23 billion in operating income; this gives a solid 42% operating margin.
Is the stock undervalued?
In order to value Taiwan Semiconductor, I plugged the latest financials into my valuation model, which uses the discounted cash flow analysis method of valuation. I have been more conservative than the company itself, predicting 10% revenue growth for next year and 5% for the next two to five years. In addition, I have predicted operating margins to maintain at 43%.
Given these assumptions, I get a fair value estimate of $142 per share. The stock is currently trading at $105 per share and thus is approximately 27% undervalued. It also has a PEG ratio of 0.9, which implies it is trading below what its growth is worth.
According to the GF Value chart, the stock is fairly valued:
Final thoughts
Taiwan Semiconductor is the dominant global leader in the semiconductor industry. Personally, I am not interested in this stock due to the risks of owning international stocks; I prefer to stick to markets that I am more familiar with, such as the U.S. market. Despite this, the stock could still be a great long-term investment opportunity.
