Why Taiwan Semiconductor Mfg. Stock Just Popped

Key Points

• Taiwan Semiconductor Manufacturing Company hit a $1 trillion market cap in Taiwan last week.

• The same stock was first valued at $1 trillion in the U.S. in May -- and costs $1.2 trillion today.

• TSMC stock costs more here than there, but it's still attractively priced in both places.

• 10 stocks we like better than Taiwan Semiconductor Manufacturing ›

Jinx! Last week, according to Bloomberg, the official market capitalization of Taiwan Semiconductor Manufacturing Company (NYSE: TSM) stock traded on the Taiwanese stock market reached $1 trillion.

No sooner did the news break than TSMC shares trading on the NYSE dropped 1.5%.

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Arbitrage in reverse?

Absent any other news, why might Bloomberg's report have jinxed TSMC stock today? Consider: Hitting $1 trillion in market cap sounds like good news. It is good news, permitting TSMC to raise cash at a good valuation to invest further in its business (should it so desire) or to pay for acquisitions with richly valued stock (should it choose to do that instead).

But here's the thing: TSMC's market cap may have just hit $1 trillion in Taiwan a few days ago. But here in the U.S., the rapidly rising price of the company's American depositary receipts (ADRs) passed $1 trillion two months ago, in May, and gave the company an implied market cap for U.S. investors of $1.2 trillion.

Is TSMC stock a buy?

Basically, Bloomberg may have intended to celebrate TSMC's arrival to the Trillion-Dollar Club of companies but instead accidentally reminded American investors that they're paying a 20% premium to own the same shares that Taiwanese investors are getting at a discount -- or worse, overpaying for TSMC stock by 20%.

I suspect this might be the reason for today's mini-sell-off. But if it is, I also think investors need not worry. Yes, TSMC U.S. ADRs cost more than TSMC common stock in Taiwan. But even U.S. investors are paying only 20 times trailing earnings for the shares. For a stock projected to grow 21% annually over the next five years, and paying a 1.7% dividend yield, that's not a lot.

And TSMC stock is still a buy.

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Rich Smith 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.