The TSMC (NYSE: TSM) share price has soared today, on news that the semiconductor manufacturer, Taiwan Semiconductors, will be opening a new factory in Japan. With a price-to-earnings ratio of 28, a market cap of over $15bn and yearly revenues in the hundreds of millions, is this a chance too good to miss for my portfolio?
TSMC was founded in Taiwan in 1984 and has been one of the leading suppliers of semiconductors ever since.
What are semiconductors? Well, they’re the main pieces of hardware that make computing possible. I won’t get into the details as they are far too complex for me to even understand, let alone write about. Suffice it to say that without semiconductors, you can’t make computers.
Given the ubiquity of computing devices, the TSMC share price has been on a steady rise since it first went public in 2006. It currently trades at ten times its initial cost.
The pandemic has caused a lot of problems for the world, but one which you may not have noticed was a worldwide shortage in semiconductors.
Semiconductors are difficult to manufacture and must be made under the strictest lab conditions. Even a single unwanted molecule can render a batch unfit for use. The entire process is incredibly expensive, sometimes taking years and requiring millions, even billions of dollars’ worth of specialized equipment and labour.
Any disruption in the supply chain can set the whole process back by months and with economies on lockdown, it was nearly impossible to find the workforce needed to mine and extract the key minerals used in production.
But demand for semiconductors has remained high throughout the pandemic and TSMC actually increased its revenue in 2020 by 50%. You can see this in the TSMC share price history. The company took a small hit at the start of the pandemic, but its share price then went on to almost double.
Even with reduced capacity, TSMC told investors that it expected to make $15.7bn in revenue in Q4 of this year. Production still remains stretched but the company is taking steps to meet demand, namely opening a new factory in Japan.
Japan factory and share price
While I was initially surprised by the decision to open a new factory in Japan, I have come to see the sense of it, and the subsequent jump in the TSMC share price.
This could be seen as a hedge against a more aggressive China. President Xi has recently talked openly about ‘reunifying’ Taiwan with the mainland. That could be behind TSMC’s decision to establish a base in another country.
However, I think the share price action has more to do with the choice by TSMC to reinvest its profits. Many companies, such as Shell or Apple, choose to use profits in expensive stock buybacks. Buybacks benefit shareholders in the short term, but prevent the company from expanding and adapting.
Reinvesting is the kind of action that benefits a company long term and opening a new factory shows TSMC’s commitment to the future.
Will I add TSMC shares to my portfolio? Yes, I think so.
I’ll be watching its price over the next few weeks in case there is a large sell-off, but I feel confident that TSMC is making the kind of decisions I want from a company I invest in.
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James Reynolds does not have a position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Taiwan Semiconductor Manufacturing. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.