Buy Taiwan Semiconductor (TSM)
Sure you want a piece of the technology action. Who wouldn’t after Apple (AAPL) broke to an all-time high after the company announced earnings on October 19. But isn’t everything priced out of reach? After all, we’re not exactly in the early stages of this rally.
I’ve found one late stage tech stock, though, that’s still cheap and that has, in my opinion, lots of potential.
Taiwan Semiconductor Manufacturing (TSM) has about a 50% share of the market for manufacturing other companies’ chips. As chip factories have gotten more and more expensive, more and more chip “makers” have farmed out the actual manufacturing to companies such as Taiwan Semiconductor.
As the biggest contract manufacturer in the world, Taiwan Semiconductor has the cash to constantly push the envelope on chip manufacturing by cramming more and more transistors closer and closer together. The chip industry passed a milestone this year when Intel (INTC), a company that prides itself on its chip-making prowess hired Taiwan Semiconductor to make some chips for it, the first time another foundry had even produced an Intel chip.
Chip makers have exited the chip manufacturing business for a sound reason: The heavy capital spending involved in today’s chip manufacturing makes that part of the industry cyclical in the extreme. When chip demand slumps, a company like Taiwan Semiconductor can see itself sitting with 50% of its capacity idle. So this is a stock that crashes hard when chip demand slows and rebounds late but like a super ball when demand picks up.
And that’s exactly what we’re starting to see clear signs of happening in 2010. I think we’re looking at a pickup in capacity utilization as a result of increasing demand for everything from cell phones to PCs that will push earnings up by roughly 35% at Taiwan Semiconductor Manufacturing in 2010. As of October 20, 2009 I’m adding the stock to Jubak’s Picks with a target price of $12 a share by May 2010.
Full disclosure: I own shares of Taiwan Semiconductor in my personal portfolio and will add to that position three days after this is posted.
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Hi Jim,
Thanks for everything you do!
What is the cash percentage of the Picks portfolio now?
Hi Jim,
Thanks for everything you do! Your TSM buy is insightful, and am thinking about buying it back based on your recommendation. But, I am going to wait a bit to see whether it will follow his past pattern, falling to $8. I used to be a long time TSM share holder until early last year. TSM prices were quite ‘stable’ between $7 and $11 in recent years. Typically, you buy it below $8, and sell it above $10. Most of my gains, though, were from the big annual stock dividends distributed in the mid-year, but not from the stock price appreciation. I think TSM started giving out annual monetary dividends and reducing stock dividends in 2004. I am not certain about the price appreciation of TSM, but the dividends are a big part of TSM overall returns from my past experience. Thanks.
I think the main problem for TSMC is strong competition. There is UMC/Charter/SMIC, then newly joined Global Foundry/Samsung. Their technology edge is thin because as foundry they all receive technology from INTEL/TI/IBM. They do have their own development on process, but process technology is strongly impacted by tool vendor, which is open to any buyers. Also, if they spend too much on process development, it is going to cut into their profit. It is true in future only major companies can build new fabs. But at least for now, 300mm fab is in no way short. With the backup from the government and Arab wealth, it won’t be very difficult for those companies to get fund to buy new immersion tool. As for Samsung, the new player, the advantage is even stronger. So my feeling for TSM is rather uncertain, maybe worth to take a short term profit instead of real long. Thanks
Cheap by what standard? Up 74% from 52 week low, PE of 25, PEG of 1.59, and within 15% of it’s five year high? I guess it might work for a short term buy but it certainly does not qualify as cheap.
I have been buying everything Mr.Jubak has recommended and couldn’t be happier. Thanks for all the great work!
-CC
I keep my eye on TSM more than 2 years and never jump in. I agree with wwweng and akexzhu. Moreover, for TSM and other Taiwan chip factories, their margins are already quite thin, and there is almost no more room to cut the cost. Unless, Taiwan and mainland China can somehow reach some deals, even a signal of a start of a peace talk, then the mainland money will rush into Taiwan’s stock market and therefor push the price up.
Jim, new to your site. I am following your picks and purchased CSCO,GLF,WRB,GLW,teva & tsm. I committed $11k to start a portfolio. How much should I leave in cash
Hi Jim,
Thanks for your insights. I was wondering what cash percentage do you recommend maintaining (or what you’re targetting for Jubak Picks) at this stage?
So, what about UMC?