Why Investors Remain Reluctant to Set a Buying Spree for Taiwan Semiconductor Shares Amid Persistent Microchip Shortage?

According to the Wall Street Journal, Taiwan Semiconductor Manufacturing Co.’s (TSM) enormous market niche poses risks to the entire global economy, amid geopolitical tensions between the U.S. and China and a protracted worldwide microchip shortage. The microprocessor chip is a multipurpose “all-in” digital integrated circuit that accepts binary data as input, processes it according to instructions stored in its memory, and provides a functional signal as output. Surprisingly, however, the TSM stock has been hovering near its flatline for a good calendar quarter. With P/E of slightly over 30X, EV/EBITDA of 17X and net debt of just $13 billion (having accounted for cash on hand in excess of $24 billion) it should have fared better. So what's going on here?

TSM was founded in 1987 as a joint venture of Philips, the government of Taiwan, and private investors. It went public as an ADR in the U.S. in 1997. The foundry leader has an illustrious customer base, including Apple (AAPL) and Nvidia (NVDA), that looks to apply cutting-edge process technologies to its semiconductor designs.

TSM became frequently cited over the past several years as the world’s most important semiconductor company, rising its uniqueness among the most valuable and irreplaceable companies in the global economy. With a market cap of over $600 billion, it ranks as the world’s 11th most highly valued company.

The company’s market share increased to 58% in 2020 from 53% in the previous year, and nowadays it manufactures almost all of the world’s most sophisticated microprocessor chips, as well as the basic ones. Microprocessor chips are literally ubiquitous. They are found in billions of products with built-in electronics, including iPhones, personal computers and car electronics– most of them can be rebranded by companies that design them, like Apple, Samsung (SMSN) and Qualcomm (QCOM) – but still sourced by TSM.

It is well known that the high tech industry is a very capital investment demanding one, so it is next to impossible for other manufacturers to create instant meaningful competition thereby alleviating the supply shortage pain. Catching momentum, the company recently announced aggressive capacity expansion plans after raising capital expenditures by over 60% and committing $100 billion over the next 3 years. The company has announced that around 80% of the budgeted capex will be allocated to expand capacity for the advanced sub-7nm process technologies.

In comparison with other larger capital spenders Intel (INTC) and Samsung, TSMC’s planned investment commitment of ~$100 billion looks very substantial. Although Intel recently announced the planned $20 bln initial investment in the Arizona factory to directly compete with TSM, this must be viewed only as a phase one investment. On the other hand, Samsung’s planned investments of $116 billion is on a par but scheduled for a much longer period of 10 years compared to just 3 for TSM.

Bottomline of TSM's relatively modest investment multiples may sound silly – simply because it has been modestly valued through its entire public company history. Having said that, one must note that the majority of recognized financial institutions assign a range of $150–165 as TSM’s target price. That implies a 30–42% upside from the current price level.