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Please send me the check. Welcome back. Today we're talking about a Taiwanese semiconductor company, TSM. We will look at the financials of this huge company that many people have probably never even heard of. We'll talk about what they've done in the past and how to move forward in terms of the share price you should pay.
We will use our stock analysis tool and our amazing software that you can have. I'll tell you all about it. I follow Paul and Mo because they have assets worth over a hundred million dollars. I saw it. I was there. We just got back from Mexico and, um, I trust them with their decisions and you can too.
Watch this video. Let's start. Field, share your thoughts on TSM. Thank you, Seth. I appreciate it. Hey follow us on our personal accounts because Seth, Mo, and I have great personal accounts and we don't want to be ignored because our egos are very fragile. So, the world's largest specialized microcircuit manufacturing plant.
Yes. So, let's move on to Everything Money Eight Pillar Software, TSM. Taiwan Semiconductor Manufacturing blah blah blah blah. Okay . So guys, first of all, let's look at this 10- year chart to see how much... Oh my God, look at this chart. So, it is now $140. 10 years ago it was $14. This is a 10-fold increase.
So guys, this is a $730 company. Are n't you shocked by this number? You've said this before with Nvidia. It's like the biggest little company that no one has ever heard of. If you were just a normal person in this world, if you asked my mom what Taiwan Semiconductor was... If you asked me 10 minutes, 5 minutes ago , what it was, I would have said it was $70 billion, $50 billion.
And that's 730 dollars. God, incredible. Guys, pillar number one, we want a five-year earnings multiple (P/E) of less than 22.5. That's 48. More than double. This is X. Okay. Pillar number two, we want a five-year return on invested capital of greater than 9%. This is 9.7. This is a check mark. So, they do a pretty good job of getting a return on capital .
Are there dividends? There are dividends. Oh, God. Talk to me. Red flag. How do you like that? 1.3% pays 9.4 billion per year. Seth, what do I always say about dividends? Well, they can't pay for it, can they ? They are too close. Look at this, guys. So guys, remember, dividends are not always safe.
People think they are safe and that is the biggest step a beginner can take in the world. You should compare their dividends to their free cash flow. Guys, last year's free cash flow was 10.5 billion, and over the past 5 years it has averaged 8.3. So, they ate 90%-95% of their dividends in the last period of their cash flow last year.
That's a lot. To me, that doesn't mean a safe, ahem, dividend yield. I do n't like it, but we'll look into it more in the future. Pillar number three, we want to see revenue growth over the last 5 years. Go to our income statement. From 35 billion to 52 billion. Check the box here. But keep in mind, guys, look at that big pocket right here.
Very slight growth between 2015 and 2019. From 31 to 38 billion. Wow. This is a big growth in the last 2 years. Is this sustainable? Well, we saw a big jump in demand for semiconductors. So, in the chip space, this could be a surge. It could be a splash or a blue- What am I looking for? Splash is a wonderful word.
Our, our, our producer Tim just said this . So, Seth, come on. Well, yeah, Tim says, "Do n't you think they're putting chips in everything?" I mean, the demand for this is likely to skyrocket. Perhaps. But, remember, guys, we saw a big spike in the last year because of the big chip shortage, right? This is not because of high demand, it is because of high shortage.
Maybe because of demand, but has it become possible? We always have a big shortage of chips when they can just raise the price forever. Your job as an investor is to be conservative and find companies that are selling for less than your conservative assumptions. Will we have more demand for chips in the future?
Absolutely. The question is whether there will be a big chip because, guys, these products are volatile. Suddenly there's a big demand, great , let's make a bunch of chips. Suddenly you flood the market with chips, and then what happens? Yes, even when you say it, I cringe because it's just not interesting, Paul, to wait patiently for this company to reach the golden mean.
You see a P/E ratio of two and you think, "I know where this video is going, but I know..." Of course, like a fool, I immediately switch to the news, and Samsung is planning to become the world's largest semiconductor manufacturer within the next 10 years. Oh, but wait a second, you know, TSMC is investing a lot more, they have plans to get even bigger, and so on, and it's like, "Oh, great, I convince myself that it's going to be the same with every company, we can find good news and bad news that validates our valuation and our ideas, right?
Hmm. That's confirmation bias. It's like we only focus on the information that we have. And trust me, we're all human, we all do that . Right? But the best thing about investing is that you can cut through the noise, be more objective in your thinking and say, wait a second, if everyone else believes this, why shouldn't I?
Why should I believe this?" Because I always look at things and say, "Everyone is usually massively wrong." Right? So, that's it . Pillar number three is revenue growth over the past 5 years. I agree with this. Pillar number four is profit growth. Then let's do it. Let's redouble our efforts. The unit had just returned from a snowstorm.
From 12.4 billion to 20 billion. But again , look at this profit figure. It grew from 11.95 to 20 in 2 years. They are doing very well. Yes. Pillar number five – we want the number of shares outstanding to remain the same or decrease. Guys, if a company has 10 shares, you own one of them, , now you own one of eight shares, which is 12.5%.
You did nothing but be a committed shareholder, and your ownership stake increased from 10% to 12.5%. This is what you want to see. OK? So, we scroll to the end. Now I'm actually moving into year six because we want the end of year six to be... "At the beginning of year five, 5.19 billion shares. Because it did n't really matter.
It's been the same for the last 10 years. So, Paul, tell me this . I always ask you, you know, when I invest in these companies and they're making these big profits, I do n't really see it. But from a cash flow perspective, I can see it from a dividend perspective. Now that these stocks are going down , and I own more and more of the company, and they're paying the same dividend, that's better, right?
Because they have... The dividend can go up if the cash flow goes up. They have more money to pay out dividends, and I own a higher percentage of the stock. Yeah. And that's the whole point. Yeah, you don't get a check at the end of the year for what's in the bank account, but if you own a portion of that bank account, which is basically what you're doing when you buy a stock, you own a piece of the business.
As Charlie Munger says, if you, if you don't own a piece of the... Business, what are you buying when you buy a stock? You're buying a piece of the business, which gives you an ownership stake in all of its debt and assets. What was that, Tim? A lot of tickets. Yeah, that's what it is. A lot of people buy a lot of tickets.
So you'll see it in a sense. If a company has $0 in the bank account today, let's say, over the next 10 years, it's going to have a trillion dollars in cash flow. Suddenly it's going to have a trillion dollars in 10 years. What are they going to do? They could just pay out a $ 900 billion dividend , and you'll get a huge check.
How much would you pay today to get a $900 billion check in 10 years? You 'll see it eventually, but it might take a while. You'll see it through debt repayment. Okay. Pillar number six, we want to look at debt. So , we go back to the main page. Hmm. We go to our 5-year free cash flow figure, $8.38 billion.
We multiply that by five. That's $40.2 billion. What did I do wrong here? That's $42 billion . Ah! We did a software update in the middle of this, um, this great analysis. So, $42 billion . We want our long-term liabilities to be less than $42 billion . So, we go to the balance sheet. We scroll all the way down to the bottom.
$21.7 billion. So, they don't really have that much debt. They can actually pay off their debt in 2.5 years if they use their free cash flow. But remember, they use their free cash flow to pay these big dividends. That's what really concerns me. Okay, pillars seven and eight are about free cash flow.
Free cash flow is cash from operating activities minus capital expenditures. And the five things you can do with it are... Oh my God, they can pay dividends, which they do. They can buy back shares, which they don't currently do, but they don't sell. They can buy... What... Can they do anything else?
Pay off debt. Yes. They can make acquisitions. They can invest back into themselves. Go ahead. So guys, we're going to simplify the math for you . We added this free cash flow line here on the cash flow statement to simplify the math . The $6.5 billion to $10.5 billion mark. But again, look at their last 10 years.
There was a big one-off year, one one-off year. Okay. So our final metric. We want to determine the market cap of the company based on free cash flow flow. That's the starting point of where we want to be. We look at their 5-year average free cash flow of 8.38. We multiply that by 20. That's $168 billion.
Oh my God. What's the market cap? 728. Against 728. Huge X, guys. This company is selling for five times more, four times more than we're getting. So let's go to the eight- pillar tab to show you guys. all of that. Okay. So guys, basically we like this company, except for two things: the valuation. Okay.
Now, guys, does that mean this company is overvalued? Not necessarily. Every investment is the present value of all of the future cash flows. We don't know the future, so we have to make assumptions. That's why we built the stock analysis tool, probably the most popular piece of our software. We put in assumptions about the future here, and it shows us exactly how much we have to pay for the company today based on these assumptions.
So let's do this. We're going to do a 10-year analysis. You can do 1 to 20. Now, as you can see here, here's 1, 5, and 10 years. You can use that as a guideline, but my job is to be conservative. So revenue growth, I'm going to do 5, 8, and 11% revenue growth . Profitability, I'm going to do 33, 34, and 35.
Free cash flow. For margin, I'm going to use 18.5, 19, and 19.5. Now, P/E, 13, 15, 17, 13, 15, 17 for price to free cash flow. And finally, our desired annual rate of return is 12.5%. Why 12.5%? You can invest in an ETF, do no work, and earn 9 or 10%. So to get a decent return on buying a single stock and have a decent margin of safety up to 12.5 percent, remember guys, you can't change the price you paid for the stock.
Once you buy it, that price is fixed. So your job is to be conservative and buy at the lowest possible price. Does that mean it won't go lower? No. It can still go lower, but if you do the analysis right and you think you're buying a share of the company, a share of the company, then you're going to keep buying more shares.
Paul, can you please explain to people, including me in the comments? Below, why for revenue growth you've given 5 8 11 , and last year it was 25%. What gives? Hmm, last year was such that if COVID had affected them, revenue would have been halved, or would the revenue decline have continued to be halved by 50% over the next 10 years?
No, I wouldn't. But last year was very volatile because of the demand for semiconductors and chips. So I have to assume that it won't last forever. Now let's look at these numbers for the company, and then we'll scale the numbers up to another level , see how overvalued it is, is it overvalued. So we're going to hit the analyze button.
Guys, look at this. The company is worth $140. I have a low price of $ 25 to $45, and a high price of $50 to $90, and in the middle, about $50. Guys, that's just overvalued. It's just extremely overvalued. Now let's change these revenue assumptions. Let's... Let's go to 10, 13, and 16. Analyze. It's still overvalued.
Guys , it's extremely overvalued. That's it. All these numbers are in the red. This is just an extremely overvalued company. I took the biggest numbers on this sheet and assumed that they would be like that for the next 10 years, and it's still inflated. So, yeah, again, people down there are going to say, " Paul, you don't understand.
This company is going to be the leader. It's better than Samsung. It's going to have that 40% for me, the way we do it. Videos a week, and in 17 of them I say that they're inflated, and people are like, "Paul, you don't understand. This is the company that's the future." How is it possible that every week I ignore 17 companies that are the future?
How many companies are actually going to be the future of this world? I think the prospects are so bright and crazy these days that they're just thinking that in many years the number one companies in the world probably won't be the same as they are now. Look at the number one companies in the world 20 years ago compared to today.
Which ones are still around? Or which ones are still the best companies in the world? You know what? funny, Paul? If you could just go back to the metrics page and, uh, look, go back 10 years. You can see this company just living, being a regular company, and then right in 2018, when we started our show, you started saying, "Wow , the market is really overvalued." Then we get this huge explosion.
If it doesn't... So I guess the point is, there are two options here. As a value investor, you can say, " Wow, this is a huge explosion." I have to avoid this and wait for it to come back to my undervaluation, or it just keeps going. Look at this surge. Look at this rally. It's incredible. We should start now, because it's going to keep going.
You know what I'm saying? So, yeah, I mean, listen, guys. If you look at this, you're looking at the stock price. Don't look at the company and its fundamentals. I prefer to look at the fundamentals of the company, and that's it. For me, when I buy a company, when I buy a share of stock, I'm buying a piece of the business.
Am I overpaying for what I think is the best future? Absolutely not. Does that mean I know what I have, but your goal is a margin of safety. The more margin of safety you have, the less you pay. It's funny. What do I always say? I've always said that risk is the price you pay. I've never heard anyone say that before.
I finally saw it last night . In my books of Charlie Munger quotes, he talks about Graham ... Ben Graham, the father of value investing, says that risk is simply the price you pay. The less you pay for something, the less risk you have, because risk is the loss of potential capital loss. The less you pay for something, the less potential capital value you have.
That's our take on the Taiwanese company Taiwanese Taiwan Semiconductor. You know, it's funny, Paul, we hear a lot of lies about investing in Chinese companies, but I haven't heard anyone question Taiwan. I know it's obviously different places . No, we hear a lot of lies about Chinese companies when they're trading at prices like Baba, which has fallen by 2/3, and now people are afraid of China risks.
Wait, but if they were trading at 320, we wouldn't care about China risks. You're right. You're right. If you're interested in getting the software that Paul is behind, you can make better decisions about your finances. Paul, tell us how you got it. And the reason we built all this software is because when we were doing videos about the company, people were coming to us and saying, "Hey, how do I analyze my own companies so I can do the analysis instead of waiting for you to do the video?" ".
So we built the software. You get everything you've seen here. You get everything on the main page, which is also coming soon to the righ me in our exclusive chat about all things money right up here. EM community chat. You get a stock analysis tool. You get a real estate calculator, a retirement calculator.
You get eight-pillar portfolios that let you put up to 50 stocks in a portfolio to tell you how all 50 companies are doing at once or 20 companies, it doesn't matter. But exclusive daily content. We put out one to three videos a day. They're called "A Few Good Minutes." They're great. Seth and Moe and I make them.
But the most important thing, guys, is the EM community. We have over 6,000 people discussing their investment ideas in the community all the time. Because the great thing about the internet is is that it allows all of us who have a certain mindset to get together and discuss our investment ideas. We have people who say, "Hey, I'm looking at blah blah blah.
I'm looking at Ford stock. What do you guys think?" And people are having a good, interesting conversation about it . All of this is available, all of this is in our tool. All of this is for less than $1 a day. Sign up now . $1 a day gets you all of this. For the price of a cup of coffee, you get all of this.
$1 a day. Sign up. And the best part is, no matter what you sign up for today, that's your price that's locked in , because the price goes up every month. But you're locked in to the price that you sign up for today. So, a dollar a day gets you all of this . Absolutely, guys. That's our take. Final thumbs up.
Download the software. You're going to love it. You can analyze companies, and, well, we 'll keep you posted on what TSM does next. And maybe one day it'll be perfect for us , but right now it just made the price for you. So that's our take. Final thumbs up. See you next week.
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