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Taiwan Semiconductor Manufacturing Corporation (NYSE: TSM)

Taiwan Semiconductor Manufacturing Corporation (NYSE: TSM)
by Daniel Nenni on 07-11-2010 at 10:09 pm

After working with TSMC the past 10+ years the single most compelling question I have is why the stock (NYSE: TSM) is not at record highs. TSMC invented and continues to dominate the foundry business which is clearly the future of modern semiconductor design and manufacture. So why is this not a $20+ stock?!?!?

TSMC reports 36%+ net margins.
TSMC delivers a 24%+ return on equity.
TSMC just announced a 3.8% dividend.
TSMC carries $6B+ total cash.
TSMC has more capacity than its top rivals combined and a third Gigafab under construction.
TSMC has almost a 7X Market Cap margin between its closest rival UMC.
So why is TSM flatlining after yet another record setting month of sales?!?!?

One of my favorite stock crowdsourcing groups agrees that TSM is undervalued. Based on the aggregate intelligence of 165k+ investors participating in Motley Fool CAPS, TSMC has a 5 out of 5 star rating. A Motley Fool CAPS rating indicates a stock’s potential to outperform the S&P 500 as determined by the community. On CAPS, 99% of the 437 All-Star members who have rated Taiwan Semiconductor Manufacturing Corporation believe the stock will outperform the S&P 500 moving forward.

Just how strong is TSMC in the global semiconductor foundry business? Well, with 45%+ market share, TSMC is about three times as big as its closest competitor, #2 foundry UMC, and more than six times as big as the #4 China based foundry SMIC. Even with the overly documented 40nm yield ramping problems, TSMC is still in charge of that node with an estimated 80% market share. Today, the race for 28nm is on with production silicon due out in Q1 2011. TSMC? GlobalFoundries? Samsung? It’s a 3 horse race, expect a photo finish, the winner is the King of the Node!

TSMC is expected to finish 2010 at $12.5B.
TSMC serves the largest and most diverse customer base.
TSMC will spend a record $4.8B on capital expansion this year.
TSMC will be trying to recruit 5,000 new employees this year.
TSMC is investing heavily in LED and Solar thin film PV technologies.
TSMC is the favorite to win the 28nm node foundry race next year.
TSMC has a 5 star Motley Fool CAPS rating.

Out of control consumer spending will continue to drive foundry revenues to record highs. Semiconductor industry mystics see foundry revenue growing 30-40% in 2010 and 8-10% annually over the next 4 years. Meanwhile, in 2010 shares of TSM and UMC are down 12% and 21%, respectively. So tell me again why TSM is yet another under performing tech stock?!?!

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