At NT$62.90, Is Taiwan Semiconductor Co., Ltd. (GTSM:5425) Worth Looking At Closely?

Taiwan Semiconductor Co., Ltd. (GTSM:5425), might not be a large cap stock, but it saw a significant share price rise of over 20% in the past couple of months on the GTSM. As a small cap stock, hardly covered by any analysts, there is generally more of an opportunity for mispricing as there is less activity to push the stock closer to fair value. Is there still an opportunity here to buy? Today I will analyse the most recent data on Taiwan Semiconductor’s outlook and valuation to see if the opportunity still exists.

Check out our latest analysis for Taiwan Semiconductor

What's the opportunity in Taiwan Semiconductor?

Taiwan Semiconductor appears to be expensive according to my price multiple model, which makes a comparison between the company's price-to-earnings ratio and the industry average. I’ve used the price-to-earnings ratio in this instance because there’s not enough visibility to forecast its cash flows. The stock’s ratio of 30.69x is currently well-above the industry average of 25.66x, meaning that it is trading at a more expensive price relative to its peers. If you like the stock, you may want to keep an eye out for a potential price decline in the future. Given that Taiwan Semiconductor’s share is fairly volatile (i.e. its price movements are magnified relative to the rest of the market) this could mean the price can sink lower, giving us another chance to buy in the future. This is based on its high beta, which is a good indicator for share price volatility.

What kind of growth will Taiwan Semiconductor generate?

Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. Although value investors would argue that it’s the intrinsic value relative to the price that matter the most, a more compelling investment thesis would be high growth potential at a cheap price. With profit expected to grow by 47% over the next year, the near-term future seems bright for Taiwan Semiconductor. It looks like higher cash flow is on the cards for the stock, which should feed into a higher share valuation.

What this means for you:

Are you a shareholder? It seems like the market has well and truly priced in 5425’s positive outlook, with shares trading above industry price multiples. However, this brings up another question – is now the right time to sell? If you believe 5425 should trade below its current price, selling high and buying it back up again when its price falls towards the industry PE ratio can be profitable. But before you make this decision, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping an eye on 5425 for a while, now may not be the best time to enter into the stock. The price has surpassed its industry peers, which means it is likely that there is no more upside from mispricing. However, the positive outlook is encouraging for 5425, which means it’s worth diving deeper into other factors in order to take advantage of the next price drop.

If you'd like to know more about Taiwan Semiconductor as a business, it's important to be aware of any risks it's facing. For example, we've discovered 3 warning signs that you should run your eye over to get a better picture of Taiwan Semiconductor.

If you are no longer interested in Taiwan Semiconductor, you can use our free platform to see our list of over 50 other stocks with a high growth potential.

If you decide to trade Taiwan Semiconductor, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.