One of the best halal stocks to buy in 2024

In an era where technology defines our tomorrow, TSM – Taiwan Semiconductor Manufacturing Company stands as a beacon of strength in the semiconductor industry.

The stock is currently significantly undervalued (Current Price: $103.82). Its P/E (TTM) is 18.72 while Forward P/E (next fiscal year) is 17.52. Analysts expect it to reach $130 at the high end, while Morningstar has a fair value estimate at $139.

Demand for the semiconductors was slow in 2023 due to an economic slowdown and supply chain adjustments the industry was making since the pandemic disruption.

This is set to change in the future. Moreover, the outlook for the semiconductor industry looks pretty good, and TSM is one of the leading companies poised to benefit from the future growth.

From a Shariah perspective, the company’s business is halal. It has low debt and low short-term investments. It has some interest income that needs to be purified.

It also scores pretty well on ESG ratings, especially in the use of resources, emissions, human rights, workforce and management. So, from an ethical perspective, the company is a great choice as well.

Its main risk comes from geopolitical tensions between China, Taiwan and the US.

5 Key Takeaways

Here are five key reasons why this company may be a good investment and one of the best halal stocks to buy in 2024:

1. Industry Growth:

The semiconductor industry, which makes essential components for electronics like phones, computers, and increasingly, cars, is expected to see significant growth in 2024. Analysts predict a growth rate of around 20%. This growth is partly due to an increase in demand for these components in various sectors, including the booming fields of smart automotive technology and personal devices.

2. TSM’s Financial Health:

Financially, TSM is on solid ground. They’ve got a good amount of cash and their debt is manageable. This is important because it shows that they can meet their financial obligations and invest in future growth. Their strong free cash flow is a good sign for investors, as it often indicates a company’s ability to generate profit. They have not skipped a dividend for the last 20 years.

3. Technological Leadership:

TSMC is a leader in its field, especially in developing advanced semiconductor technologies. They are consistently ahead of competitors in creating smaller, more efficient semiconductor nodes (which are crucial for powering advanced electronics). This kind of innovation is key in technology sectors and gives TSMC a competitive edge.

The company holds a commanding position in the semiconductor industry, thanks in part to its leadership in advanced technology nodes like N3 and N5. TSMC’s focus on R&D and strategic investments in emerging technologies such as the 2-nanometer node aligns with the evolving demands of the high-tech world. This positions TSMC as a leader in technological innovation, which is critical for long-term growth in the semiconductor sector.

TSMC has managed to maintain its process leadership, outpacing competitors like Intel in developing smaller technology nodes. This edge is critical in the semiconductor industry, where technological superiority often translates into market dominance. TSMC’s ability to introduce advanced technologies like the 3nm and soon the 2nm processes further solidifies its market position.

4. Market Analysis and Predictions:

Market analysts have a positive view of TSM’s stock, with many suggesting it’s a good buy. There are projections of the stock price increasing, which is a sign of confidence in the company’s future performance.

5. Risks and Considerations:

Of course, investing always comes with risks. In the case of TSM, geopolitical tensions between Taiwan, China, and the US could impact the company. Moreover, global economic shifts could influence the semiconductor industry as a whole.

Semiconductor Industry Outlook for 2024

The outlook for the semiconductor industry in 2024 is expected to be positive, with several key trends shaping the sector:

1. Growth Recovery:

The semiconductor market is on track for a strong recovery in 2024. After facing a decline in 2023, the industry is anticipated to witness significant growth. IDC predicts a growth rate of about 20% for the semiconductor market in 2024. This recovery is partly due to the end of inventory depletion in the supply chain and the resurgence of market segments like PCs and smartphones.

2. Automotive and AI Influence:

The automotive sector, particularly with the advent of Advanced Driver Assistance Systems (ADAS) and infotainment systems, is expected to be a major driver of semiconductor market growth. These segments are forecasted to show significant growth rates through 2027, owing to the ongoing trend towards automotive intelligence and electrification. Additionally, the increasing integration of AI in various devices, from data centers to personal gadgets, is anticipated to boost semiconductor demand.

3. Semiconductor Industry Confidence:

The Semiconductor Industry Confidence Index score stands at 54 for 2024, indicating a more positive than negative outlook. This optimism is seen despite some concerns over workforce growth, R&D spending, and capital expenditures.

4. Inventory and Pricing Dynamics:

High inventory levels in the automotive and industrial sectors are expected to normalize by the second half of 2024. The memory market, which saw a significant recession in 2023, is likely to rebound as production cuts push up product prices. Additionally, the demand for high-priced High Bandwidth Memory (HBM) is set to grow.

5. Foundry Industry and China’s Role:

The foundry industry is poised for double-digit growth in 2024, with a focus on advanced process technologies. China’s role in the semiconductor market is becoming increasingly significant, especially in mature process technologies, due to U.S. trade restrictions and their active expansion of production capacity.

6. Advanced Packaging Technologies:

There is a growing interest in advanced packaging technologies. The 2.5/3D package market is expected to grow at a Compound Annual Growth Rate (CAGR) of 22% from 2023 to 2028. This growth is indicative of the increasing complexity and performance requirements of semiconductor chips.

7. Capacity Expansion in CoWoS Supply Chain:

The demand for AI servers is driving the expansion of the CoWoS (Chip on Wafer on Substrate) supply chain, with an estimated capacity increase of 130% by the second half of 2024. This expansion is crucial for meeting the robust demand for AI chips.

8. Revenue Projections:

IDC has raised its revenue outlook for the semiconductor industry, projecting a growth to $526.5 billion in 2023 and further to $633 billion in 2024. This growth is attributed to improved visibility in the supply chain, increasing demand from AI server and endpoint device manufacturers, and a new investment cycle within the supply chain.

The semiconductor industry is expected to rebound strongly in 2024, driven by recovery in key market segments, advancements in automotive and AI technologies, and significant growth in advanced packaging and foundry industries.

Conclusion

TSM presents a strong investment case for 2024 based on its financial health, market leadership, and technological advancements. While there are risks associated with geopolitical tensions and global economic uncertainty, the company’s solid fundamentals and positive market and analyst sentiments make it a potentially attractive investment.