My 2022 Biggest Bet: Taiwan Semiconductor Company

Alot of people has been asking me what my stock pick for the year 2022 will be. After analyzing across various industries, considering opportunity cost and risk-reward-ratios, I have made the biggest bet on one company, that will definitely thrive in 2022 and return more than the S&P500. 

What is this company?

The company here is $Taiwan Semiconductor Manufacturing(TSM)$. As the name suggest, Taiwan Semiconductor Manufacturing Company Limited manufactures and sells integrated circuits and semiconductors. This company is a BPO company, where other company such as $Apple(AAPL)$, $AMD(AMD)$ and Nvidia obtain their semiconductor supply from. This company has chip foundries all over the world, making it a successful multinational corporation. 

How have the earnings been?

Revenue has grown at a CAGR rate of 10.3% from 2014-2020. While earnings have grown at a CAGR rate of 12.43%. Earnings have more than doubled since 2014 due to the high demand of semiconductor. This company is also a free cash flow machine. The company has a free cash flow of USD 11 Billion after deducting all expenses, paying off debts and dividends, and reinvesting into new foundries. The free cash flow has grown at a rate of 16% per annum for the past 6 years.

How is the financial health of the company?

Company has a debt-to-equity ratio of 28%. However, the company has more cash on hands than its debt. As of the latest financial result, the company has a debt of NT 582 Billion while the cash on hands is NT 989.5 Billion. The company's debt is well covered by operating cash flow (170.6%). The financial health of the company is so healthy and it has the most perfect and strongest Balance Sheet. 

Why this stock is my biggest bet for the year 2022:

●Global Chip Shortage

Everything these days require semiconductor. Cars, Laptops, handphones and even television. It is no secret that global demand of Chips are rising, and there is just a shortage of chips since 2020. All the foundries of Taiwan Semiconductor Company is fully booked for the year 2022 and they have many months of backlog orders. The company has chip foundries that can produce chips of the latest technology. Due to that, every company out there is paying extra money to Taiwan Semiconductor Manufacturing Co. to produce their orders of semiconductors first. This will boost the earnings of this company for the year 2022. 

●Growth Potential

Taiwan Semiconductor Manufacturing co has the strongest moat in this field. They produce 55.9% of the worlds semiconductor, compared to Global Foundries (9.4%), Samsung Electronics (7.7%), SMIC (5.5%) and others (20%). Due to this company having the strongest moat and customer base, as well as the most technological savvy foundry in the world, all major businesses such as AMD and Apple wants them to make the chips. Taiwan Semiconductor has invested 100 Billion in 2020 to open up more foundries to satisfy the massive backlog orders they have received. 

●Valuation is Right

Based on FY2020 net income, a 6% discount rate and a conservative growth rate of 10%, the valuation of this company is undervalued by 27%. I believe that the company is selling at a discount and there is a margin of safety for all value investors. Always remember the golden rule, price is what you pay value is what you get. 

Final conclusion:

With that being said, I believe this company should be in everyone's portfolio for the year 2022. Semiconductor is an essential in today's world, and what better than a company with strong free cash flow, strongest moat and the healthiest balance sheet? Let me know what you think of this analysis and let me know if you are buying as well!