Taiwan Semiconductor rides chip demand to record revenue

- TSMC's net profit was $7.9 billion for the quarter, beating analysts' estimates.

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- Revenue grew 30% year-over-year and exceeded forecast at $18.6 billion.

- Management stated that chip supply will continue to be limited and customers will continue to reduce inventory throughout the year.

Taiwan Semiconductor (NYSE:TSM) is a Taiwanese multinational contract semiconductor manufacturing and design company. The company has more than 480 customers, including Apple (NASDAQ: AAPL), Huawei, Qualcomm (NASDAQ: QCOM), Xilinx, Nvidia (NASDAQ: NVDA) and AMD (NASDAQ: AMD). The stock was trading up 2.5% pre-market after the earnings release.

Global demand for chips across all industries continues to cause shortages. TSMC continues to enjoy strong demand, but has also struggled lately to keep up with demand. Global chip demand is expected to grow 9-10% this year, beating previous analyst estimates of mid-single-digit growth.

The biggest source of demand in the second quarter was demand related to automotive, HPC and IoT. Automakers have struggled throughout 2021 to meet chip demand, which has resulted in lower revenues for many automakers. As a result, the current quarter has been marked by a strong increase in demand, which has helped to improve revenues. Technology contributed 21% of demand, while smartphones generated 38% of revenue. The rest of the demand came from automotive, DCE, IoT and "others". North America continues to be the main source of demand, followed by China, EMEA, and then the rest of Asia.

TSMC management reiterated that it will continue to invest in factories as demand is expected to remain tight throughout the year. TSMC has planned to build 6 factories in the United States and also plans to build factories in countries like Japan. The company had forecast $44 billion in CAPEX for 2022, but with demand slowing, management has indicated it will move some of that capacity to next year as a smartphone, and PC demand remains. brittle. Utilization rates remain strong for the year and chip demand has held up despite inflationary pressures, so revenues for 2022 are expected to remain strong. Total capital expenditures for the quarter were $7.34 billion and TSMC is on track to hit at least $30-35 billion in investments for the year.

TSMC also posted higher gross and operating margins than analysts had expected. The most important factor driving the increase in margins was pricing power, and despite pressure from raw material costs, TSMC was able to overcome the problem by raising prices. Cash also increased by 21% to $3.5 billion, which could lead to higher dividends.

TSMC competitors such as Qualcomm (NASDAQ:QCOM) and Intel (NASDAQ:INTC) have struggled to keep up with demand and stocks are down from their 52-week high. Similarly, TSMC is also down from its 52-week high, but continues to trade at a premium to its peers. This reflects the quality of TSMC's customers, customers such as Apple, Nvidia, and AMD, all of which have superior products.

TSMC is currently trading at around 19 times price to earnings and has an ROI of around 20%, which is quite high for a capital-intensive company. The debt ratio also remains low at 0.35 and the overall health of the balance remains quite healthy. Given the high growth rate, a P/E of 19x and forward earnings of 14x can be considered cheap for a stock that is expected to outperform for the foreseeable future. The stock is currently yielding 2.3%, which may be a little low for the current macro environment.

The biggest risk for TSMC remains the drop in market demand. Automotive demand remains solid, with backlogs and low inventories plaguing the market. But demand for PCs and demand for data centers may decline as the year progresses. Smartphone sales have also started to decline due to China and a slowdown in demand. TSMC management...