Buy Taiwan Semi as It Gets a Bigger Piece of Apple's Pie

NEW YORK (TheStreet) -- A number of analysts are raising estimates ahead of Taiwan Semiconductor's (TSM) scheduled earnings release July 17. Of the 32 analysts polled by FactSet, 27 of them raised their estimates in the month of June.

The main source of that revenue momentum is coming from Apple (AAPL), which is expected to contribute from 13% to 15% of TSMC's revenue in the second half of this year, up from only 4% in the second quarter. TSM stock recently traded at $22.31, up nearly 28% for the year to date.

TSMC should see a very aggressive ramp-up of 20 nonometer (nm) revenue starting in the third quarter. According to DigiTimes, TSMC plans to operate at full capacity during the second half of this year.

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With 20nm orders coming in from Apple and other leading edge customers such as Xilinx (XLNX), AMD (AMD), and Qualcomm (QCOM), analysts are expecting the revenue contribution from 20nm to rise to 20% by the end of the year.

Apple is launching a bunch of new products this year. The iPhone 6 is coming out in September. A new iPad Air is coming out in the fourth quarter of 2014. A potential larger iPad is coming out in the first half of 2015. All of these products are expected to be migrating to 20nm A8 mobile application processors manufactured by TSMC.

TSMC's 20nm process technology is smaller and can provide 30% higher speed and while using 25% less power. But technological superiority is not the only reason that Apple is further utilizing TSMC in its supply chain. Given ongoing lawsuits and direct competition from Samsung (SSNLF) products, Apple is trying to shift away from using Samsung as its primary supplier.

Apple is still one of Samsung's biggest customers for processors and memory chips. Apple's component orders from Samsung were around $10 billion last year. But it is no secret that Apple is hoping to ditch Samsung in favor of other companies such as TSMC and privately held Global Foundaries.

Apple has, in the past, asked to invest in TSMC or have TSMC set aside factory space dedicated to Apple chips. But TSMC's Chairman Morris Chang rejected these requests, preferring instead to remain more independent and flexible. But given Apple's strained relationship with Samsung, it is expected that TSMC will continue to become a bigger part of Apple's supply chain and therefore receive a bigger share of Apple's pie.

Gunderson Capital Best Stocks Now Analysis

Taiwan Semiconductor (TSM) is currently ranked #89 out of our 3800+ stock universe and receives an overall grade of A-. It is a large-cap technology name with a market cap of $113.9 billion. Its risk profile is considered conservative. The company's annual revenue last year was $20.5 billion.

We started buying shares of the stock in late March. Another attractive aspect of the shares is that it pays a 1.9% dividend. We own it for our Income and Growth accounts.

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Lower-valuation names continue to be favored in the current market environment. Taiwan Semi has a Value Grade of B+ and trades at a trailing P/E of 18 and a forward P/E ratio of only 14. With a five-year annual growth rate of 15%, this stock is relatively cheap with a PEG ratio below 1.

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Coupled with improving demand trends in the sector, cheap semis like Taiwan Semiconductor have worked well relative to the overall market. The stock earns a momentum grade of B+ and a performance grade of B+.

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Taiwan Semiconductor is reasonably valued and has strong growth prospects in the coming year benefitting from Apple's new product cycle and ramp up of 20nm A8 technology. Most analysts are expecting the company to guide up when it reports in mid-July. It continues to be a perfect example of a "Best Stock" for right now.

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At the time of publication the author was long TSM and AAPL.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates TAIWAN SEMICONDUCTOR MFG CO as a Buy with a ratings score of A+. TheStreet Ratings Team has this to say about their recommendation:

"We rate TAIWAN SEMICONDUCTOR MFG CO (TSM) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, increase in stock price during the past year, growth in earnings per share and expanding profit margins. Although no company is perfect, currently we do not see any significant weaknesses which are likely to detract from the generally positive outlook."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • TSM's revenue growth has slightly outpaced the industry average of 2.8%. Since the same quarter one year prior, revenues slightly increased by 9.3%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • TSM's debt-to-equity ratio is very low at 0.26 and is currently below that of the industry average, implying that there has been very successful management of debt levels. To add to this, TSM has a quick ratio of 1.77, which demonstrates the ability of the company to cover short-term liquidity needs.
  • The stock has risen over the past year as investors have generally rewarded the company for its earnings growth and other positive factors like the ones we have cited in this report. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
  • TAIWAN SEMICONDUCTOR MFG CO has improved earnings per share by 15.4% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, TAIWAN SEMICONDUCTOR MFG CO increased its bottom line by earning $1.18 versus $1.10 in the prior year. This year, the market expects an improvement in earnings ($1.46 versus $1.18).
  • The gross profit margin for TAIWAN SEMICONDUCTOR MFG CO is currently very high, coming in at 72.98%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 32.29% significantly outperformed against the industry average.

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