The Fool's Take
Taiwan Semiconductor Manufacturing Co. is a major supplier for leading chip companies such as Nvidia, Advanced Micro Devices and Broadcom. While TSMC's second-quarter revenue grew 44% year over year, steadily improving gross profit margins and a disciplined cost structure fueled even more acceleration for its bottom line: Earnings per share grew by nearly 61%.
Investments in infrastructure for artificial intelligence (AI) -- which include data center buildouts and chips -- are expected to reach $6.7 trillion by next decade.
With TSMC's huge revenue growth and estimated two-thirds share of the global chip foundry market, it appears well-positioned to capitalize on these secular tailwinds and acquire even more market share over the next several years.
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Despite the company's jaw-dropping growth and robust outlook, it recently traded at a forward price-to-earnings ratio below 25. Not only is this lower than most of its forward P/E ratios in 2024, but it's also a meaningful discount compared to other leading chip stocks.
There are some risks being based in Taiwan. That exposes the company to the impacts of any changes in U.S. tariff policy, as well as the looming threat of China taking military action. Still, it's tough to find a better growth stock in the semiconductor industry for risk-tolerant long-term investors.
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(The Motley Fool owns shares of and recommends Taiwan Semiconductor Manufacturing.)
Ask The Fool
From Y.C., Decorah, Iowa: Shares of Microsoft seem to cost more than $500 apiece -- does that mean the company will do a stock split? And will that double my money?
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Microsoft may indeed split its stock this year or next. No announcement has been made as of this writing, though.
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Microsoft has executed nine stock splits since going public in 1986. Seven were in the 1990s, and the most recent one was way back in 2003, when the shares split 2-for-1. The recent price of $500 per share is far above the pre-split prices for the past splits, so expecting a split to come along is quite reasonable.
A stock split won't double your money, though -- when a stock splits, shareholders each get more shares, but the price per share falls proportionally. Imagine you own 100 shares of Microsoft, and it splits 2-for-1 when the price is $500 per share. You'll end up with 200 shares, but the share price will suddenly be around $250.
That makes your total value $5,000 pre-split (100 times $500) and $5,000 post-split (200 times $250).
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Companies often split shares to make them more affordable to the masses (among other reasons), but remember that you can always buy just one share -- and via many good brokerages, you may even be able to buy a fraction of a share.
from T.S., Las Cruces, N.M.: Where can I learn more about real estate investment trusts (REITs)?
Try reading Real Estate Investing for Dummies, by Eric Tyson and Robert S. Griswold (For Dummies, $25), or REIT Investing for Beginners: How To Get Rich in Real Estate Without Owning a Single Physical Property (Freeman Publications, $20). You could also visit REIT.com.
The Fool's School
As you learn how to study stocks, you'll find that the price-to-earnings (P/E) ratio can help you get a rough idea of how overvalued or undervalued a stock is.
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You'll find P/E ratios for stocks already calculated for you at financial websites such as Finance.Yahoo.com, but here's the math: Take the stock's current price per share and divide it by the earnings per share (EPS) over the past 12 months. (For a forward-looking P/E, divide by the expected EPS over the coming year.)
So if Crusty's Crab Shack is trading at $60 per share with its EPS for the last four reported quarters ("trailing 12 months") totaling $4, you'd divide $60 by $4 to get a P/E ratio of 15. Note that P/E ratios go up when the stock's price rises or the EPS falls -- and vice versa.
The P/E ratio tells you how much you'd pay per dollar of earnings if you bought the stock. In finance-speak, a stock with a P/E of 15 might be referred to as "trading at a multiple of 15." Generally speaking, the lower the P/E ratio, the lower -- and therefore more appealing -- the stock's valuation, though an extremely low P/E should make you wonder what troubles the company is facing.
An extremely high P/E can reflect very low earnings or investors piling into the stock and driving up its price via high demand for the shares. P/E ratios vary widely by industry, though.
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Slower-growing and/or capital-intensive industries such as homebuilding and steelmaking tend to have lower average P/E ratios; industries such as semiconductors, entertainment and software tend to have higher ones.
Unprofitable companies don't have P/E ratios, as they have no earnings and you can't divide by zero. When assessing a company's P/E, you might compare its current ratio with those from past years.
Don't make investment decisions on P/E or other valuation metrics alone, though. Always assess multiple factors, such as revenue and earnings growth rates, debt levels, profit margins and competitive advantages.
My Dumbest Investment
From O.A.M., online: My dumbest investments happened after I read the book The Code Breaker by Walter Isaacson -- about the Nobel Prize winner Jennifer Doudna and the science of gene editing with CRISPR ("clustered regularly interspaced short palindromic repeats") technology.
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I invested in several of the companies mentioned in the book, thinking each would soon release viable commercial products and see its valuation skyrocket. I waited for a few years as I watched each stock decline in price. I eventually ended up selling at a significant loss.
I learned to stick with companies that already have viable products, sound financials and strong free cash flow. One day these companies may fit that narrative, but until then, I will invest in what I know are actual viable businesses and not potential future businesses.
The Fool responds: New technologies can be exciting, especially when it seems like there will be a lot of money made with them, and some companies in those realms will turn out to be great investments. But it can take a long time before it's clear which companies will be the biggest winners and which once-promising companies will flame out.
It's better to spread out your dollars over several companies and technologies. If you can't wait to invest, spreading your dollars over several companies and not investing too much in one technology can be smart moves.
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(Do you have a smart or regrettable investment move to share with us? Email it to TMFShare@fool.com.)
Who Am I?
I trace my roots to 1968, when a Korean War vet from Wisconsin asked three Norwegian shipping companies to invest in a cruise company focused on a particular sea.
Today, with a recent market cap near $100 billion and a fleet of 68 ships, I'm a cruise giant, traveling to seven continents. I carry millions of passengers each year.
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My brands include Celebrity Cruises, Silversea and my own name, and I own 50% of a joint venture that operates TUI Cruises and Hapag-Lloyd Cruises. My logo features something that sits high and something that goes low.
Who am I?
Forget last week's question? Find it here.
Last week's answer: Publix Super Markets