2 growth stocks that could win big from TSMC’s $40 billion spending plan


Semiconductor manufacturing in Taiwan (NYSE:TSM), popularly known as TSMC, released its fourth quarter results on January 13 and the chip giant’s shares surged following the report as it became clear that demand for chips will remain strong in 2022 and beyond.

One of the highlights of TSMC’s report was the sharp increase in the company’s capital expenditure budget for 2022. The company presented a capital expenditure budget of $40 billion to $44 billion for this year, indicating an increase of approximately 40% over the 2021 capex of $30 billion. This expected increase is not surprising given the global shortage of semiconductors that has crippled several industries.

TSMC expects annual revenue growth of 15% to 20% in the coming years, double what it had previously estimated. To achieve this, it needs to make more chips to meet booming demand, and it needs to invest in equipment so it can ramp up production. The big jump in the company’s planned spending to meet this need bodes well for Applied materials (NASDAQ: AMAT) and ASML Company (NASDAQ:ASML), both of which supply semiconductor manufacturing equipment to TSMC.

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Applied materials

Applied Materials, according to the company, “develops, manufactures and sells a wide range of manufacturing equipment used to manufacture semiconductor chips”, and TSMC is one of its largest customers, generating 15% of the company’s revenue. ‘Applied Materials during the fiscal year that ended October 31. That made the Taiwanese chip giant its second-biggest source of revenue after Samsung, which accounted for 20% of Applied Materials’ revenue last fiscal year.

So it’s not hard to see why TSMC’s aggressive capital spending plan is good news for Applied Materials. After all, TSMC’s massive uptick in investment last year gave Applied Materials a major boost. The company’s fiscal 2021 revenue jumped 34% to a record $23 billion, driven by a sizable increase in its semiconductor backlog.

Applied Materials points out that its order backlog consists of “orders for which written authorizations have been accepted, or for which shipment has occurred but revenue has not been recognized”, indicating that the company is on the right track. to record another strong year fulfilling these orders. TSMC’s investment plans for 2022 mean that Applied Materials could see strong order growth again this year.

All of this helps make Applied Materials one of the top semiconductor stocks to buy right now, especially given its earnings multiple of 24 and future earnings of 18.7, which makes it cheaper than the S&P500, which sports an earnings multiple of 28.8. Analysts expect Applied Materials revenue to grow 15% in fiscal 2022, along with a 20% increase in earnings per share, but it won’t be surprising to see the business grow at a faster rate thanks to TSMC.

ASML Company

One of the reasons TSMC reported 24% year-over-year revenue growth in the fourth quarter is strong demand for processors based on the 5-nanometer (nm) manufacturing process. TSMC said 5nm chips accounted for 23% of its fourth-quarter wafer shipments, while 7nm chips accounted for 27% of wafer sales.

TSMC said advanced processor nodes generated more than half of its total revenue in the quarter. Additionally, TSMC is reportedly looking to pump money into more advanced process nodes that will further reduce chip size. Tom’s Hardware reports that the company could spend 70% to 80% of its planned 2022 investments on fabs that could build 2nm, 3nm, 5nm and 7nm chips.

The publication added that since TSMC spent a lot of money building fabs capable of making 5nm chips last year, it is likely to invest more money in fabs capable of making chips. based on 2nm and 3nm processes in 2022. This would be great news for ASML as sub-7nm chips can only be made by a process called extreme ultraviolet (EUV) lithography, and the Dutch giant is the only company to manufacture these machines.

ASML is estimated to control over 90% of the semiconductor lithography market, while its share of the EUV lithography market is nearly 100%. This puts ASML in an excellent position to benefit from TSMC’s increased capital spending this year, and should help the former maintain its impressive growth in 2022.

ASML expects its revenue to grow 20% in 2022. While that’s slower than the 33% growth it achieved in 2021, the company could raise its guidance as the year goes on thanks to the huge backlog it is sitting on. ASML’s net bookings at the end of 2021 increased to €26.2 billion, more than double the €11.2 billion in net bookings it had a year ago. Such massive growth in ASML’s order book is not surprising as it reportedly derives 31% of its revenue from the sale of its machines to TSMC.

ASML therefore appears built for the upside in 2022. ASML is a growth stock that investors may want to hold for the long term. The company expects to generate annual revenue of €24 billion to €30 billion by 2025, a big bump from its earlier expectations of €15 billion to €24 billion, indicating that the semiconductor spending boom is going to be a long-term catalyst for ASML.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.


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