Demand for Chips Shows No Signs of Slowing. Is Taiwan Semiconductor Too Expensive Now?
Key Points
TSMC's market cap is now above $2 trillion.
The chip foundry giant is forming a joint venture with Sony to produce next-generation image sensors.
- 10 stocks we like better than Taiwan Semiconductor Manufacturing ›
The artificial intelligence (AI) chip craze can't be discussed without including the behemoth Taiwan Semiconductor Manufacturing Company (NYSE: TSM). The third-party chip manufacturer has been one of the standout stocks of the past year, up nearly 80%. That substantial rise has pushed the company's valuation past $2 trillion, but investors are starting to question how long the chip boom will last. Is TSMC too expensive now?
TSMC's growth has been impressive. In the second quarter, its revenue jumped 36% year over year, while net income and diluted earnings per share rose 77.4%. The company's strong free cash flow has given it an enviable balance sheet, and its dividend payouts have more than doubled in the past three years.
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Chip demand isn't slowing, and TSMC is also pursuing new opportunities. For example, it's in the process of setting up a joint venture with Sony (NYSE: SONY) to produce next-generation image sensors. That multibillion-dollar collaboration will supply high-performance camera sensors for iPhones and future physical-AI use cases. The duo is targeting mass production by 2029.
Image source: The Motley Fool.
The stock isn't cheap, but its valuation metrics are still quite reasonable. The company's forward P/E ratio is just 25, while the trailing P/E ratio is 36. TSMC's five-year PEG ratio is almost exactly 1, implying the stock is fairly priced.
Given the new partnership with Sony and the expectation for continued high chip demand through the second half of this decade, TSMC may not be a bargain, but it is still surely worth buying and holding. No, Taiwan Semiconductor is not too expensive for investors looking to hold it for the long haul.
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Catie Hogan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
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