TSMC Stock: World’s Largest Company, Stupidly Cheap (NYSE:TSM)

Taiwan Semiconductor Manufacturing Company (New York Stock Exchange: TSM) is perhaps the most important company in the world.

TSMC is a pure-play semiconductor foundry with the majority of the global share of foundry revenue, and more than 3 times the share of its nearest competitor, Samsung (OTCPK: SSNLF) (OTCPK: SSNNF).

But market share alone underestimates TSMC’s dominance. The company has a significant advantage in process technology that allows it to manufacture chips at the highest level of transistor density, cost-effectively and with the best yields/quality in the industry. At the high end, there is no competition. That’s why all the big companies that sell/market high-end processors – Apple (AAPL), AMD (AMD), Nvidia (NVDA), Intel (INTC), Amazon (AMZN), Google (GOOG) (GOOGL) , etc. .—lined up at TSMC’s door and paid billions in advance payments to secure space in TSMC’s fabs.

And the gap is deep. The development of process technology is expensive. TSMC announced that it will spend more than $100 billion in investments over 3 years. As Samsung and Intel desperately try to catch up, they themselves have announced tens of billions of dollars in spending.

If TSMC disappeared today, trillions of dollars of economic activity around the world would come to a halt. Global production of cars, phones, computers, and other devices would drop dramatically or come to a complete halt for some time. Software and services related to all of these products would fall in the same way. For example, all Apple iPhones, watches and computers rely on TSMC chips. This article does not have the space to detail the extent of a disaster that would be for the whole world.

TSMC’s strength is demonstrated by its ability to sustain 44% revenue growth even during the ongoing semiconductor industry downturn as COVID demand declines and Ethereum mining demand is phased out. .

Normally, in this current market, a company with a technology monopoly, a strong balance sheet, and strong earnings growth of 76% YoY in the last quarter, would trade at a PE of at least 30+. For example, Nvidia is trading at around TTM PE 50 despite profits about to fall off a cliff (due to the elimination of demand for Ethereum GPUs) and revenue growing only 3% YoY at second trimester. Instead, TSM is trading at a stupidly cheap price of 13 times likely 2022 earnings!

Comparison T2

	TSMC	Nvidia
Revenue	$18.16 billion	$6.7 billion (estimated)
Non-GAAP gross margins	59.1%	46% (estimated)
Towers annual growth	43.5%	3% (estimated)
Annual EPS growth	76%	TBD, but will be down
Market capitalization	$440 billion	$450 billion

Click to enlarge

The reason for the surprisingly low market capitalization is the irrational fear of a Chinese takeover of Taiwan and a misunderstanding of what would result.

TSM’s China Discounts Fear Is Irrational

The media and financial experts have feared for years that China could invade Taiwan. It came to a head in recent weeks with President Pelosi’s visit to the island. But let’s go beyond the narrative and look at the 4 possible scenarios in this situation:

1. status quo
2. Peaceful reunification
3. Chinese takeover not peaceful, but in a manner acceptable to the rest of the world.
4. Chinese invasion unacceptable to the rest of the world (almost certainly resulting in WWIII)

Scenario 1: Status quo

In the status quo scenario, TSMC continues to dominate the semiconductor industry and rapidly increase its profits. Eventually, the market capitalization will reach a reasonable valuation given the dominant position in the sector and the strong earnings growth.

This is by far the most likely scenario in the short/medium term.

Scenario 2: Peaceful reunification

In the scenario of peaceful reunification, TSMC continues to dominate the semiconductor industry and rapidly increase its profits. Presumably, TSM shares would be treated like other US ADRs of Chinese shares. Eventually, the market capitalization will reach a reasonable valuation given the dominant position in the sector and the strong earnings growth.

This scenario is somewhat likely to play out in the coming decades, should the Taiwanese decide that it is best to be officially part of China.

Scenario 3: Chinese takeover not peaceful, but acceptable to the rest of the world

It’s hard to imagine a non-peaceful takeover acceptable to the rest of the world. Nonetheless, any acceptable takeover would necessarily mean that Taiwan’s tech companies, and TSMC in particular, are unscathed. It would also mean that TSM shares would remain in place and would be treated like other US ADRs of Chinese stocks. There is no scenario where TSMC fabs are tampered with and the world accepts that outcome. Eventually, the market capitalization will reach a reasonable valuation given the dominant position in the sector and the strong earnings growth.

This scenario is unlikely.

Scenario 4: Chinese invasion, unacceptable to the rest of the world

In a Chinese invasion scenario, TSMC and the Taiwanese tech industry would largely cease to function. As TSMC President Dr. Mark Liu said, TSMC depends on the cooperation of the United States, Europe, and nations to operate. These nations would permanently stop cooperating if the Chinese invaded. International sanctions and other actions (likely including direct military actions) against China would be much deeper than those taken against Russia during the recent invasion of Ukraine.

Sanctions would devastate much of China’s economy. China has an export-oriented economy and trade would be interrupted. China also depends on other nations for important resources like coal and foods like pork and soybeans.

The international economy would also be devastated. Companies like Apple would have no products to sell. Walmart’s shelves would be largely bare. Automakers around the world may not be able to make cars. Even chipmakers with factories outside of Taiwan would be confused because finished products could not be assembled without a diversity of components (many of which come from Taiwan). And many devices are assembled in China, which would be another supply chain that would come to a halt. The economic calamity is difficult to quantify.

The world needs the fabs of TSMC and Taiwan’s tech industry to keep it going. A Chinese invasion almost certainly means World War III.

All this devastation would certainly destroy the stock prices of thousands of companies around the world. The performance of TSM’s stock may not differ significantly from that of other companies like AAPL and NVDA that depend on TSMC and China for their products.

And all of this assumes that the hypothetical Chinese invasion would be successful – a very dubious claim. An invasion of this magnitude is difficult to carry out and the Chinese are not accustomed to military operations. The Chinese saw what happened with Russia invading Ukraine. Both with the international response and with Russia’s struggles on the battlefield. Russia has a much more experienced army. And it’s much easier to fight a war where you share a long land border than a war across ocean waters.

It’s an unlikely scenario.

Key points to remember

Chinese people have a culture of patience. They know that aggressive action against Taiwan in the short term is economic suicide and will lead to World War III. The prudent strategy is to steer towards peaceful reunification in the coming decades. China’s belligerent rhetoric is not incompatible with a long-term strategy of forcing Taiwan to reunite — peacefully if coerced as well.

It is absurd to depreciate TSM to such a degree as the entire global economy collapses and the revenues of companies like AAPL and NVDA are decimated, in any scenario where TSM’s equity is compromised. It makes much more sense to buy mindlessly cheap TSM and hedge with short positions or put options on high indices or multiple companies like NVDA or AAPL that would be trampled under a Chinese invasion scenario. Owning TSM offers high growth at a steep discount, with relatively low downside risk greater than other popular stocks in a World War III scenario.