With technology advancing at a blistering pace, investors should be on the lookout for companies that are at the forefront of the digital revolution. It’s easy to see why, as some of the biggest companies in the world by market capitalization are technology companies. Most investors understand how critical digital devices like computers, cloud data centers, and smartphones are in the world today, and they should only increase in prominence as time goes on. That’s why buying a company that creates the chips which power those devices makes so much sense.
Semiconductors are used in nearly every digital device and the companies that produce them have tons of potential in the years ahead. One of the most intriguing semiconductor stocks to consider buying at this time is Taiwan Semiconductor Manufacturing Company (NYSE:TSM). The stock has been on a tear this year and offers several compelling reasons to add shares at this time. Let’s discuss them in more detail below.
The Big Guys Go to TSMC for Their Manufacturing
Taiwan Semiconductor Manufacturing Company, or TSMC, is the world’s largest pure-play semiconductor foundry by revenue. The company operates with a fabless business model, which means that it receives proprietary chip designs from its customers and manufactures them in its numerous factories. Major companies love using TSMC for manufacturing their chips because it can provide significant cost savings thanks to the fact that it is located in a country with more affordable labor costs. That’s a major reason why this stock is a great option.
TSMC has a total foundry market share of 56% and produced 10,761 different products using 272 unique process technologies for 499 customers in 2019. You will probably recognize some of the company’s customers, as it manufactures products for Apple, Nvidia, Advanced Micro Devices, Qualcomm, and Broadcom. While the semiconductor market is highly cyclical, the fact that TSMC consistently wins work from the biggest companies in the world thanks to its advanced processing systems makes it a solid pick for any portfolio.
At the Forefront of 5G Wireless
There are many different ways to gain exposure to the 5G wireless network technology that will soon be powering smartphones and digital devices around the world. Perhaps one of the best options is adding shares of a company like TSMC. Since Taiwan Semiconductor produces the smartphone chips for some of the most popular products on the market including Apple’s iPhones, it’s a company that stands to benefit greatly from the rollout of 5G.
According to a recent IDC study, the U.S. 5G smartphone market will reach a total of 35.2 million units shipped in 2020, which represents a 2280% increase from 2019. IDC also anticipates a CAGR of 150.7% for smartphone shipments in the U.S. during the 2020-2024 time period. As smartphone users look to upgrade their phones to faster 5G devices and companies continue rolling out more advanced technology, TSMC could benefit greatly from this growth catalyst.
Continued Earnings Growth and Reliable Dividends
Another logical reason to consider adding TSMC to your investment plans is that it has consistently delivered earnings growth this year. The Q3 earnings for the company impressed with a 29.2% year-over-year revenue increase to $12.14 billion along with an EPS increase of roughly 36% year-over-year. Sales figures in Q3 were also strong, as net sales increased by 32.5% year-over-year. It’s clear that TSMC’s foundries are firing on all cylinders, and a lot of the company’s success at this time has to do with the rollout of popular products like Apple’s iPhone 12 and Sony’s Playstation 5, which both rely on TSMC’s chips.
Taiwan Semiconductor also offers investors a dividend yield of 1.71%, which is a nice bonus when you consider the price appreciation upside for the stock. As the company continues to see strong demand for its products, improves its operating margin, and generates strong free cash flows, future dividend increases are always a possibility. For the last 5 years until 2019, the company’s total dividend payout grew at a CAGR of 10.8%.
There are plenty of great reasons to consider adding shares of a company like TSMC. It’s an industry leader that is benefitting greatly from current market trends. Thanks to its cutting edge process technologies and the potential for additional semiconductor companies to explore a fabless business model, TSMC could be a huge winner over the long term. Investors should look to add shares on pullbacks going into 2021.
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An insider trade occurs when a corporate executive (such as a CEO, CFO or COO) that has non-public information about a company buys or sells shares of that company's stock. Company insiders are required by law to regularly report their stock purchases and sales to the SEC.
Tracking a company's insider trades is a metric that can be used to identify the direction that the company's executives believes that the company is headed. If a number of insiders purchase more shares of their company, they may believe that the company will have strong future earnings and that the share price will increase in the near future.
For example, if Microsoft's CEO, CFO and COO all recently purchased additional shares of Microsoft stock, that would be an indication that there could be unreported news that may positively effect Microsoft's stock price in the near future.
This slideshow lists the 15 companies that have had the highest levels of insider buying within the last 180 days.
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