Semiconductor stocks are not to be ignored. We’re not talking about a handful of stocks that make commoditized products and are low-margin producers. Due to evolutions in technology –technologythat almost every industry now leans on – semiconductors are in a near-constant state of demand.
We go through ebbs and flows when it comes to shortages in the semiconductor space. However, I believe this industry acts as a bellwether for the economy. When we hit true contraction points in the economy, it’s felt in the semiconductor space. In that way, we can use theVanEck Semiconductor ETF(NASDAQ:SMH) as a sort of guide on the market.
As cyclical as the semiconductor space is, there are also many trends that are secular in nature. This is not a collection of automakers, a business that does well during strong economies and suffers greatly during recessions.
Semiconductor companies feed into secular businesses, including smartphones, cloud-computing, artificial intelligence and machine learning, datacenters, gaming, drones, supercomputing and so forth.
While some areas may feel some pressure – like smartphones or automotive – firms with five- to 10-year outlooks or longer are not going to stop investing in the cloud or datacenters because of a short-term economic contraction.
Again, it’s not to say these companies are recession proof – they’re not – but there is underlying demand that will remain present in good times and bad.
Taiwan Semiconductor Manufacturing Company (TSM)
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Taiwan Semiconductor(NYSE:TSM) is interesting, because it’s not one of the semiconductor stocks that first comes to mind for many investors. But with its $490 billion market cap, it’s an absolute behemoth in the industry.
Investors not only overlook the size of Taiwan Semiconductor, but also the performance. Earlier this year, the company sported a market cap of nearly $650 billion as it was hitting all-time highs in mid-January.
Most stocks can’t make that claim – not even Nvidia and AMD. Those two were down 23% and 20% from the highs on the same day TSM was hitting new highs, respectively.
In any regard, this isn’t a company to sleep on.
Analysts expect 28% revenue growth this year, then 15% growth in 2023, 17% growth in 2024 and 13% growth in 2025. On the earnings front, estimates call for more than 40% growth this year. That’s followed by estimates calling for 10% growth in 2023 and 16.6% growth in both 2024 and 2025.
Granted, these are just estimates, but it shows just how powerful of a company this is – and we’re not done.
Remember how we were just gushing about Nvidia’s 32% net profit margin? Well TSM has trailing net margins of 38%. The cherry on top is the valuation, which sits at just 16 times earnings – cheaper than both Nvidia and AMD.
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