TSM or Taiwan Semiconductor Manufacturing had just released their quarterly earnings report.
The numbers look impressive with continued strong growth.
So is TSM a buy at current prices?
Let’s check it out.
Let’s start with the income statement. The numbers presented here are all in US Dollars.
The revenue has continued to grow to $14.9B from $13.3B the previous quarter. On a YoY basis, the revenue grew by 22.6%.
TSM Revenue
Based on management’s guidance for the next quarter, TSM is expecting revenue to grow to $15.4B at the lower end. That would give a YoY revenue growth of 21.5%.
TSM Next Quarter Revenue Guidance
The top line looks strong with continued growth and no slowdown in the semiconductor space for TSM.
The cost of revenue has also risen in tandem.
TSM Cost of Revenue
The net result is a jump in gross profit from $6.6B to $7.6B.
TSM Gross Profit
The gross margin has remained strong at 51.3%. TSM’s management is looking at the gross margins like an eagle, and they intend to keep it above 50% by driving superior value for their customers compared to their competitors.
TSM Gross Margin
And as the technology leader for wafer manufacturing, TSM is enjoying these superior margins.
The R&D expenses have remained flat for the past few quarters. But the Sales & General admin is slowly creeping up.
TSM Operating Expenses
After taking away the rest of the expenses, the Net Income has come in at $5.6B.
TSM Net Income
And with a net margin of 37.7%.
TSM Net Margin
So far, the TSM’s story of growth and profitability is strong.
The EPS is $1.10 and is continuing to grow.
TSM EPS
At the current price of $114, the PE ratio is 29. It is on the high side.
TSM PE Ratio
The PEG ratio is 1.29, which is also on the high side.
TSM PEG Ratio
Let’s move on to the cash flow.
The Operating cash flow is also strong and came at $11.4B.
TSM Operating Cash Flow
Capital expenditures were $6.8B. This is the area where TSM falls short.
TSM is a manufacturer of wafers. And wafer manufacturing is a complex process requiring complex and expensive equipment. Unlike the construction sector, where the equipment can last for many years with relatively low maintenance, semiconductor equipment needs frequent renewal to catch up with technology.
And this requires continuous and heavy capital expenditures.
TSM Capital Expenditures
The net effect of this is a hit on the free cash flow. As you can see here, although TSM’s revenue has been growing for the last five years, the free cash flow has gone into the negative a few times and has remained low compared to the operating income.
TSM Free Cash Flow
The companies that benefit from the investment in the capital are equipment manufacturers such as Lam Research and Applied Materials. I made a video on those two recently and here’s the links.
Applied Materials Stock Analysis Video
Lam Research Stock Analysis Video
While we are on the topic of cash flow, TSM has embarked on a quarterly dividend payout since 2019. TSM has been giving out dividends of $2.3B per quarter.
TSM Dividend Payout
Still, the cash position has been strengthening, and TSM sits at a cash pile of $30B.
TSM Cash Position
TSM’s total assets sit at $119B, with a liability of $45B.
TSM Assets and Liabilities
The bulk of the assets are in Property, plant, and equipment. These are real assets.
TSM Property, Plant and Equipment
The other thing I’m concerned about TSM is the rising debt. It was grown from $0.8B in 2019 to $16.5B.
TSM Long Term Debt
The question that beckons is, why take on more and more debt if the cash position is strong?
Let’s take a look at the technical analysis. Here’s the weekly chart going back to 2014. The price has been slowly trending up but only shot up in 2020. It went from $45 to $142 before dropping back to $110.
TSM Technical Analysis – Weekly Chart Going Back to 2014
It has been trading between $110 and $128 since April this year. It appears to have built a strong support base at $110.
TSM Technical Analysis – Daily Chart
I don’t see it dropping below $110. So if you are already invested, you can hold on with a target price of $128. That would give a reward of $14 compared to the downside risk of $4 if it drops from $114 to $110.
It might even reach the previous high of $142.
In that case, the reward will be $28 compared to the risk of $4.
Either way, that is a poor risk-reward ratio at current prices.
So although TSM is a market leader in wafer manufacturing, and poised to continue to grow, it is overpriced at current levels, and the risk-reward ratio is not in favor either.
I’ll have to pass this one. But if you are invested, you can hold on first.
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In this post, I’ll be sharing the insights I’ve learned from the latest earnings report of Micron Technology.
I’ll also be doing a technical analysis towards the end of the post.
So stick around and enjoy this one.
We start with revenue right at the top of the income statement.
Micron Technology Revenue Chart
The upcycle and downcycle that you see in this chart is a typical characteristic of the semiconductor industry. And Micron is at the extreme end of the spectrum with a steep rise and a sharp decline.
These are quarterly numbers going back to 2014.
I wanted to find out exactly why there was the steep rise from 2016 thru 2018 and also the fall off the cliff right after.
So I did some research into the annual reports of 2019, 2020, and the most recent report for 2021.
Micron has stated that the rise in revenue in 2018 was due to higher demand and higher ASPs.
Micron Technology – 2018 Revenue Rise
If you are a semiconductor or technology stocks investor, you must track the ASP or average selling price. The ASP will rise and fall with the demand. And market leaders will generally command higher ASPs compared to the general market players.
Micron Technology – Average Selling Price (ASP)
Micron has provided their ASP numbers in the latest earnings report. As you can see, the ASPs rose in 2017 and 2018 by 18% and 36%. And dropped heavily in 2019 and 2020.
The revenue dropped by 23% in 2019 and a further drop of 30% in ASP.
Micron Technology – 2019 Revenue Drop
The drop slowed down in 2020, but the restrictions to shipments to Huawei hampered recovery.
Micron Technology – 2020 Revenue Drop
Micron is primarily in the memory sector, and this is one of the most volatile of all semiconductor market space.
But the good thing for Micron its memory products are used across the semiconductor markets covering data centers, PC & Graphics, and Mobile devices.
Micron Technology – Products
This is still a growing market space. There is no slowing demand for memory space. Even mobile devices have up to 256 GB of space to hold the videos and photos that people are capturing.
Micron is expecting industry growth in the low 20 percentile in 2021 and mid-teens in 2022.
Micron Technology – Industry Outlook
And with their revenue guidance for the next quarter is $7.65B. At the lower end of the range, the YoY revenue growth will be 29%. Still, a very decent growth.
Micron Technology – Next Quarter Revenue Guidance
But lower than the last quarters 36.6%.
It is hard to ignore the previous rise and fall. Are we going to see another dip back to the valleys of 2019 of around $4B or lower?
There isn’t enough evidence or visibility at the moment. This sector is driven by market demand. And there is no way to tell for sure what the market condition will be in the next six months.
And Micron has not provided any guidance beyond the next quarter. Unlike companies like Lam Research to Applied materials that have provided revenue guidance until 2024.
Moving down the income statement, the Cost of revenue has been rising since 2014. Since Micron produces hardware, the manufacturing cost rise with the revenue.
Micron Technology – Cost of Revenue
And the net effect is pressure on gross profit. So while the revenue has been hitting near the previous record levels, the gross profit is not anywhere near the previous high of 2018.
Micron Technology – Gross Profit
But still, the gross margin has climbed to a decent 47%.
Micron Technology – Gross Margin
The R&D investment has been rising and sits at $705M. While the Sales & General Admin is only seeing a marginal increase to $236M.
Micron Technology – Operating Expenses
This is a good trend. Technology companies should invest far more in R&D compared to Sales & General Admin.
After taking away all the expenses, the Net Income is $2.7B. And Micron has been consistently profitable since 2016.
Micron Technology – Net Income
The lowest net margin in recent times was 8.4%. And the most recent quarter is 33%.
Micron Technology Net Margin
That has resulted in a nice bump up in Earnings per share at $2.38.
Micron Technology EPS
At the current price of $70.12, the PE Ratio is 14.4, bringing Micron into the value investors range.
Micron Technology PE Ratio
And the PEG ratio is just 0.39. Again, this is a very good valuation.
Micron Technology PEG Ratio
While the free cash flow has been good for the last two quarters, it was in the negative or low positive numbers for the last two years.
Micron Technology Free Cash Flow (FCF)
The reason for this is the heavy and continuous capital expenditures that Micron has to invest in its manufacturing facilities.
The capital expenditures have been rising since 2014.
Micron Technology Capital Expenditure
But the operating cash flow also rose and dropped in the same fashion as the revenue.
Micron Technology Operating Cashflow
So overall, the free cash flow also came under pressure.
But Micron’s cash position has been solid. And they are sitting on a cash pile of $7.8B.
Micron Technology Cash Position
Their balance sheet is also solid. Assets have been growing while liabilities have remained flat. The biggest asset class is property, plant, and equipment.
Micron Technology Assets and LiabilitiesMicron Technology Property, Plant and Equipment
And they have very low goodwill. So their assets are real assets.
On the liabilities side, their debt is at $6B, around 10% of total assets. And the debt has been going down over the years.
Micron Technology Long Term Debt
It is good to see that management is allocating the capital to retire debt, repurchase stocks, and they are also embarking on a dividend policy. Micron has never given out dividends previously. Now there is a plan to consistently share the profits with the stockholders thru dividends.
Micron Technology Capital Allocation
But I did not see any plans to grow into new areas or through acquisitions.
So the growth story for Micron is to invest in their core competency and grow in their market space.
While the memory market is poised to grow for many years, it is a volatile market with plenty of competitors.
The book value per share has been growing consistently and sits at $39. And at the current price of $70, the price to book value is a low 1.9.
Micron Technology Book Value
Let’s look at the technical analysis.
Micron Technology Support Band
The previous resistance band was between $60 and $65.
It tried to break above this band three times between 2018 and 2020. Finally, the market decided to break above it with a gap up and strong push.
It went all the way to $96 and has now dropped slowly to $70.
$70 seems to be holding up well. And the MACD has dropped to neutral levels. It is likely to hold at this level and push up again and retest the $100 mark.
That would give a $30 reward.
On the downside, I don’t think it will drop below $65. The risk would be $5 then, giving it a good risk-reward ratio.
Micron Technology Support
But to be safe, it would be better to wait for a breakout from the blue trend channel.
Micron Technology Buy on Breakout of Trend Channel
Another thing is, it also depends on the overall market. The S&P 500 has been dropping the past few weeks and might place further pressure on the price.
Micron is a buy for me with a time horizon of 3 to 6 months. It is a good company, revenue is expected to be strong in the next quarter, and technically it is at a strong support level.
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Intel has just released its latest quarterly reports for Q1 of 2021 this week. Revenue is flat from the previous quarter, and operating income is down 37% from last year.
In this video on Intel Stock Analysis, I’m going to dive into the financials and the technical charts to see whether,
Is Intel worth investing in?
Is it a buy or a sell at the current price?
And whether Intel is trending up or down from the technical charts.
So let’s jump into it.
Revenue
The revenue has been on a generally steady growth since 2016 from $13.7B to $19.7 B in the most recent quarter. But it has slowed down in recent quarters.
The YoY revenue growth that has seen positive growth in 2018 and 2019 has turned negative.
Intel has been facing intense competition from its main rival AMD. Intel has been a leader in the processor arena for many years but finally, AMD caught up in 2020 and has released its processors that have even higher performance.
The intense competition from AMD is evident in the trend of flattish revenue growth.
Cost of Revenue
While the revenue has turned flat, the cost of revenue has continued to tick up in the recent quarters.
Gross Profit
The result of flattish revenue and increased cost is the drop in gross profit.
There is a clear drop in gross profit from Q1 of 2020 from $12B to $10.8B.
Gross Margin
The gross margin has been on a decline since 2018 from the high of 64.5% to the mid-50s.
Still, these are very good margins.
Intel can achieve this level of margins due to three key reasons.
Firstly, they are in a high technology space that it difficult for newcomers to enter the market. Designing and producing processors is an extremely complex task.
Secondly, their main competition is just AMD. Although they have other competitors such as Nvidia in the GPU space.
Thirdly, Intel has been continuously improving manufacturing such as their 7 NM wafer technology.
In the processor space, the smaller it is, the faster and more powerful it becomes. And that translates into higher margins.
They have announced another $20B will be invested in two new wafer fabs in Arizona.
Operating Expenses
One interesting trend here is the increase in R&D investment while the Selling and Administration have been on the way down.
I like this trend as R&D investment directly results in better products that drive higher revenue and profitability.
Better products also mean that lesser marketing is needed.
Total Operating Expenses
The total operating expenses have been on a steady decline but have jumped in the most recent quarter from $5.4B to $7.2B.
I did some checks to find out why and found this was due to a provision of $2.2B for litigation on IP infringement by VLSI.
A further check revealed that Intel has been facing such claims from VLSI and a few other companies since many years back.
In 2020, Intel stated that they believe these proceedings are not expected to materially harm the financial position. However, they also stated that it comes with inherent uncertainties and unfavorable resolutions could include substantial monetary damages.
In the most recent report, Intel has now accrued a charge of $2.2B due to the VLSI litigation.
This news probably spooked the investors and the share price dropped right after the results announcement the past week.
This is the reason why I like to turn the financial numbers from tables to charts cause it immediately flags out such anomalies.
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Operating Income
Intel is a profitable company and has been producing operating income consistently. But the income has dropped in recent quarters and is heading lower.
Net Income
The net income is in line with the operating income.
There was this Tax Provision in Q4 of 2017 that sent the Net Income to a negative region.
Net Margin
The Net Margin has between 24% and 34% for the past two years. But it has dropped to 17% in the most recent quarter.
Trailing EPS
The trailing EPS of the last four quarters is $4.45. And is following the same pattern of decline that we have seen in the net income.
Operating Cashflow
Intel has good positive cash flow from operations. Really solid consistent performance.
Investing Activities
There is a constant cash outflow in investing activities.
It is primarily due to the investment in property, plant, and equipment.
Besides that, there is also investment in marketable securities.
Free cash flow
The trailing free cash flow for the last four quarters has gone into a slight decline compared to the healthy growth in 2018 and 2019.
Free cash flow is operating income minus the investment in property plants and equipment. It is an indication of the real earned income after investing in continued operations in the business.
While Intel is pulling in good numbers, the trend shows it is probably a mature company with limited room for further growth.
Financing Activities
The cash outflow of financing activities is mainly due to dividend payments and stock repurchase.
Stock Repurchase
Intel also buys back its shares.
Cash Position
The net effect of all the cash outflow in investing and financing activities has resulted in a flat cash position for Intel.
Although Intel has good cash flow from operations, the cash position has been flat in 2018 and 2019. There was an increase in 2020 but has since dropped back.
Quick Ratio
The position of cash holdings is evident in the Quick ratio that is sitting at a low 0.2.
Balance Sheet
Overall, Intel’s balance sheet is steady with the Total Assets have grown from $105B to $150B. And the Total Liabilities have increased too but at a lower level from $45B to $62B.
Property, plant, and equipment form the bulk of the assets at $57B.
Goodwill is at $27B, and intangible assets account for $8.4B.
The rest of the Total assets are formed by accounts receivables, cash, marketable securities, and prepaid expenses.
Debt
Intel has a long-term debt of around $33B.
But the current debt level is about 22% of total assets. So I’m not too concerned about it.
Net Interest over Net Income
Furthermore, the interest expenses are only about 5.7% of profits.
So the balance sheet is quite strong.
Book Value per Share
The book value per share is at $21.77 currently and has been growing. The book value measures the net asset value, which is total assets minus the total liabilities on a per-share basis.
Price to Book
At the current price of $59, Intel is trading at a multiple of 2.7 times price-to-book.
That is a very good value. Usually, value investors look for a multiple of below 5.
Cash value per share
Intel is one of those companies that is asset rich and cash poor. The cash value per share is just $1.3.
PEG Ratio
As the YoY revenue is hardly growing in recent times the PE to Growth ratio is negative.
The PEG ratio measures the PE in terms of revenue growth from the same quarter the previous year.
It is used to value the stock price based on revenue growth, and clearly, Intel fails this test.
Technical Analysis
Intel’s share price has appreciated from $12 in 2009 to $68.
Intel Weekly Chart
The longer-term trend is still on the way up.
Taking a closer look at the daily chart, the recent price activity has formed strong support at $44 and there is overhead resistance at $68.
Intel Daily Chart – Major Support and Resistance
The most recent price action from the support of $44 to $68 is captured in the blue trend channel. This channel has been broken in the last two weeks.
Intel Channel Breakout
I believe the market has anticipated mixed results for Intel, and when the results were confirmed it just dropped from $64 to $59.
$59 is also another support level that is holding the price.
Intel Price Support Levels
And the next support is at $54.
AMD will be announcing their results this week, and I’m expecting AMD to post a strong quarter with their new range of processors and GPU that they brought to the market end of 2020.
If that happens, Intel might take another beating and move even lower.
Summary
So is Intel worth investing in? It is profitable and has a strong balance sheet. However, the profits have started to decline.
Is it worth it at current prices? The valuation of 2.7 Price to book is a very good value for a technology leader with a strong net margin of 17%.
Technically, while the overall trend is still up, the price is under pressure, and I would like to see it stabilize first.
AMD will be announcing their results this coming week, and I’ll be doing a similar video for AMD.
And I will also be doing a side-by-side comparison of AMD and Intel similar to the one I did for the 5G stocks.
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Elliott Wave Analysis 