Taiwan Semiconductor Manufacturing Co Stock Is Estimated To Be Significantly Overvalued
- By GF Value
The stock of Taiwan Semiconductor Manufacturing Co (NYSE:TSM, 30-year Financials) appears to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $124.8 per share and the market cap of $647.2 billion, Taiwan Semiconductor Manufacturing Co stock gives every indication of being significantly overvalued. GF Value for Taiwan Semiconductor Manufacturing Co is shown in the chart below.
Because Taiwan Semiconductor Manufacturing Co is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 11.1% over the past three years and is estimated to grow 12.69% annually over the next three to five years.
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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Taiwan Semiconductor Manufacturing Co has a cash-to-debt ratio of 2.20, which which ranks in the middle range of the companies in Semiconductors industry. The overall financial strength of Taiwan Semiconductor Manufacturing Co is 8 out of 10, which indicates that the financial strength of Taiwan Semiconductor Manufacturing Co is strong. This is the debt and cash of Taiwan Semiconductor Manufacturing Co over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Taiwan Semiconductor Manufacturing Co has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $45.8 billion and earnings of $3.417 a share. Its operating margin of 42.32% better than 98% of the companies in Semiconductors industry. Overall, GuruFocus ranks Taiwan Semiconductor Manufacturing Co's profitability as strong. This is the revenue and net income of Taiwan Semiconductor Manufacturing Co over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Taiwan Semiconductor Manufacturing Co is 11.1%, which ranks better than 71% of the companies in Semiconductors industry. The 3-year average EBITDA growth rate is 11.7%, which ranks in the middle range of the companies in Semiconductors industry.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Taiwan Semiconductor Manufacturing Co's ROIC is 28.69 while its WACC came in at 9.13. The historical ROIC vs WACC comparison of Taiwan Semiconductor Manufacturing Co is shown below:
Overall, The stock of Taiwan Semiconductor Manufacturing Co (NYSE:TSM, 30-year Financials) is estimated to be significantly overvalued. The company's financial condition is strong and its profitability is strong. Its growth ranks in the middle range of the companies in Semiconductors industry. To learn more about Taiwan Semiconductor Manufacturing Co stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
